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ECONOMICS LEGISLATION COMMITTEE
02/06/2010
DEPARTMENT OF THE TREASURY

Consideration resumed from 1 June 2010

Senators in attendance:

Senator Sherry, Assistant Treasurer



Dr David Gruen, Executive Director

Mr Tony McDonald, General Manager, Macroeconomic Policy Division

Dr Steve Morling, General Manager, Domestic Economy Division

Mr Adam McKissack, Principal Adviser, Forecasting, Domestic Economy Division

Mr Paul Flanagan, General Manager, International Finance Division

Mr Mike Kooymans, Senior Adviser, International Finance Division

Mr Bill Brummitt, General Manager, International and G20 Division

Mr Robert Ewing, General Manager, Macroeconomic Modelling Division

Mr Liangyue Cao, Senior Adviser, Macroeconomic Modelling Division



Mr Nigel Ray, Executive Director

Ms Peta Furnell, General Manager, Social Policy Division

Mr Peter Robinson, Principal Adviser, Social Policy Division

Mr Chris Foster, Principal Adviser, Social Policy Division

Mr Damien White, Manager, Social Policy Division

Mr Steve French, General Manager, Industry, Environment and Defence Division

Mr Russ Campbell, Principal Adviser, Industry, Environment and Defence Division

Ms Natalie Horvat, Manager, Industry, Environment and Defence Division

Ms Jan Harris, General Manager, Budget Policy Division

Ms Luise McCulloch, Principal Adviser, Budget Policy Division

Mr Jason Allford, Principal Adviser, Budget Policy Division

Ms Sue Vroombout, General Manager, Commonwealth-State Relations Division



Mr David Parker, Executive Director

Mr Mike Rawstron, General Manager, International Tax and Treaties Division

Mr William Potts, Manager, International Tax and Treaties Division

Mr Greg Wood, Manager, International Tax and Treaties Division

Ms Brenda Berkeley, Secretary, Board of Taxation and General Manager, Indirect Tax Division

Ms Maryanne Mrakovcic, General Manager, Tax Analysis Division

Mr Phil Gallagher, Manager, Tax Analysis Division

Mr Colin Brown, Manager, Tax Analysis Division

Mr John Clark, Manager, Tax Analysis Division

Mr Anthony King, Tax Analysis Division

Mr Marty Robinson, Manager, Tax Analysis Division

Mr Paul McCullough, General Manager, Business Tax Division

Mr Michael Willcock, General Manager, Personal and Retirement Income Division

Mr Tony Coles, Manager, Personal and Retirement Income Division

Mr Trevor Thomas, Principal Adviser, Personal and Retirement Income Division

Mr Nigel Murray, Manager, Personal and Retirement Income Division

Ms Christine Barron, General Manager, Tax System Division

Mr Jason McDonald, Principal Adviser, Tax System Division

Ms Mary Balzary, Principal Communications Adviser, Tax System Division

Mr Brant Pridmore, Manager, Tax System Division



Mr Jim Murphy, Executive Director

Mr Richard Murray, Executive Director, Policy Coordination and Governance

Mr Geoff Miller, General Manager, Corporations and Financial Services Division

Ms Vicki Wilkinson, Principal Adviser, Corporations and Financial Services Division

Mr Mark Sewell, Manager, Corporations and Financial Services Division

Mr Daniel McAuliffe, Acting Manager, Corporations and Financial Services Division

Ms Marian Kljakovic, Manager, Corporations and Financial Services Division

Ms Alix Gallo, Manager, Corporations and Financial Services Division

Dr Richard Sandlant, Manager, Financial Services Taskforce

Ms Lorraine Allen, Senior Adviser, Australian Financial Centre Forum

Mr Patrick Colmer, General Manager, Foreign Investment and Trade Policy Division

Mr John Lonsdale, General Manager, Financial System Division

Ms Jacky Rowbotham, Manager, Financial System Division

Mr Justin Douglas, Manager, Financial System Division

Mr Roger Brake, Manager, Financial System Division

Dr Steven Kennedy, General Manager, Infrastructure, Competition and Consumer Division

Mr Brad Archer, Principal Adviser, Infrastructure, Infrastructure, Competition and Consumer Division

Mr Bruce Paine, Principal Adviser, Competition Infrastructure, Competition and Consumer Division

Mr Andrew Deitz, Manager, Infrastructure, Competition and Consumer Division

Mr Paul McBride, Principal Adviser, Cities and Housing, Infrastructure, Competition and Consumer Division

Mr Simon Writer, Manager, Infrastructure, Competition and Consumer Division

Mr Paul Madden, Program Director, Standard Business Reporting Management Group

Mr Greg Divall, Program Manager, Standard Business Reporting Management Group

Mr Peter Martin, General Manager, Australian Government Actuary


Mr Brian Pink, Australian Statistician

Mr Trevor Sutton, Deputy Australian Statistician, Social Statistics Group

Ms Gillian Nicoll, Assistant Statistician, Office of the Statistician

Mr Paul Lowe, Assistant Statistician, Population Census Branch

Mr Michael Belcher, Chief Financial Officer

Mr Denis Farrell, Deputy Australian Statistician, Population, Labour, Industry and Environment Statistics Group

Mr Ian Ewing, Deputy Australian Statistician, Macroeconomics and Integration Division

Ms Sue Phillips, Acting Assistant Statistician, Corporate Services Division

Mr Peter Harper, Chief Operating Officer

Mr Vince Lazzaro, Assistant Statistician, Human Resources Branch

Mr Garth Bode, First Assistant Statistician, Social Statistics Group


Mr Graeme Samuel AO, Chairman

Mr Brian Cassidy, Chief Executive Officer

Mr Marcus Bezzi, Executive General Manager, Enforcement and Compliance Division

Mr Tim Grimwade, Executive General Manager, Mergers and Acquisitions Group

Mr Mark Pearson, Executive General Manager, Regulatory Affairs Division

Ms Jo Schumann, Executive General Manager, Corporate Division

Ms Michelle Groves, Chief Executive Officer, Australian Energy Regulator

Mr Scott Gregson, Group General Manager, Enforcement Operations

Mr Nigel Ridgway, Group General Manager, Compliance, Research, Outreach and Product Safety

Mr Adrian Brocklehurst, Chief Finance Officer

Dr Richard Chadwick, General Manager, Adjudication Branch

Mr Sebastian Roberts, General Manager, Water Branch

Mr Sean Riordan, General Manager, NBN Engagement and Industry Compliance Branch


Mr Neil Hyden, Chief Executive Officer

Mr Michael Bath, Director, Financial Risk

Mr Gerald Dodgson, Head of Treasury Services

Mr Andrew Johnson, Head of Compliance and Reporting

Mr Pat Raccosta, Chief Finance Officer


Dr John Laker, Chairman

Mr John Trowbridge, Member

Mr Keith Chapman, Executive General Manager

Mr Senthamangalam Venkatramani, General Manager


Mr Michael D’Ascenzo, Commissioner of Taxation

Mr David Butler, Second Commissioner

Mr Bruce Quigley, Second Commissioner

Ms Jennie Granger, Second Commissioner

Mr Mark Konza, Deputy Commissioner, Small and Medium Enterprises

Ms Raelene Vivian, Chief Operating Officer

Mr Neil Olesen, Deputy Commissioner, Superannuation

Mr Robert Ravanello, Chief Finance Officer


Mr Tony D’Aloisio, Chairman

Ms Belinda Gibson, Deputy Commissioner

Mr Michael Dwyer, Commissioner

Mr Justin Owen, Manager, Government Relations

Mr Matthew Abbott, Senior Executive Leader, Corporate Affairs


Mr Gary Bank AO, Chairman

Dr Michael Kirby, Acting Head of Office

Ms Lisa Gropp, Principal Adviser, Research

Mr Terry O’Brien, First Assistant Commissioner

CHAIR (Senator Hurley) —I declare open this public hearing of the Senate Economics Legislation Committee. The Senate has referred to the committee the particulars of proposed expenditure for 2010-11 and related documents for the portfolios of Innovation, Industry, Science and Research; Resources, Energy and Tourism; and Treasury. The committee must report to the Senate on 22 June 2010 and has set 30 July 2010 as the date by which answers to questions on notice are to be returned. Under standing order 26, the committee must take all evidence in public session. This includes answers to questions on notice. Officers and senators are familiar with the rules of the Senate governing estimates hearings. If you need assistance, the secretariat has copies of the rules. I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised, which I now incorporate in Hansard.

The extract read as follows—

Public interest immunity claims

That the Senate—

(a)   notes that ministers and officers have continued to refuse to provide information to Senate committees without properly raising claims of public interest immunity as required by past resolutions of the Senate;

(b)   reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c)   orders that the following operate as an order of continuing effect:

(1)   If:

(a)   a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document from a Commonwealth department or agency; and

(b)   an officer of the department or agency to whom the request is directed believes that it may not be in the public interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which the officer believes that it may not be in the public interest to disclose the information or document to the committee, and specify the harm to the public interest that could result from the disclosure of the information or document.

(2)   If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to the minister.

(3)   If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or document.

(4)   A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result from the disclosure of the information or document to the committee could result only from the publication of the information or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the committee as in camera evidence.

(5)   If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement does not sufficiently justify the withholding of the information or document from the committee, the committee shall report the matter to the Senate.

(6)   A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from raising the matter in the Senate in accordance with other procedures of the Senate.

(7)   A statement that information or a document is not published, or is confidential, or consists of advice to, or internal deliberations of, government, in the absence of specification of the harm to the public interest that could result from the disclosure of the information or document, is not a statement that meets the requirements of paragraph (I) or (4).

(8)   If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall then be required to provide a statement in accordance with paragraph (3).

(Extract, Senate Standing Orders, pp 124-125)

[9.02 am]

CHAIR —The committee will begin today’s proceedings by continuing its consideration of the Treasury Macroeconomic Group and will then follow the order as set out in the circulated program. I again welcome the Assistant Treasurer, Senator Sherry; and officers of the department. Dr Gruen or Minister, would you like to make an opening statement?

Senator Sherry —I do not wish to make an opening statement.

Dr Gruen —Nor do I.

CHAIR —Thank you.

Senator JOYCE —The projected surplus in 2012-13 falls in a projection period as opposed to an estimates period of budget. Do you agree with that statement?

Dr Gruen —The macroeconomic forecasts are in the years 2009-10, 2010-11 and 2011-12, and then 2012-13 is the first projection year. That is correct.

Senator JOYCE —Can you, for the purposes of Hansard, tell us briefly the difference between a projection and an estimate.

Dr Gruen —And a forecast, you mean.

Senator JOYCE —And a forecast—sorry.

Dr Gruen —I can. As you would be aware, macroeconomic forecasting is a difficult business and it is increasingly difficult the further out you look. We, along with most other organisations, make the judgment that beyond a certain point we cannot do any better than forecasting that the economy will grow at trend, so our standard assumption is that at the current point, beyond 2011-12, we simply assume that the economy will grow at trend. We do make some exceptions to that general rule. For instance, as you would be aware, in last year’s budget, because at that time we thought the economy was going to be a long way below its potential at the end of the forecast period, we changed our medium-term projection assumptions and assumed that the economy would be growing above trend in the projection years, at least for several of them. However, given that the outcome has turned out so much more favourably than we had expected, we have reverted to our standard assumption that growth would be at trend in the projection years. This is always a matter of judgment and we apply a slightly different assumption for the terms of trade, which I am happy to go into if you want me to.

Senator JOYCE —You would agree that the government has lauded the billion dollar surplus in 2012-13. It is one of the—

Dr Gruen —I am not going to comment on that.

Senator JOYCE —Do you agree that the government has stated that there will be a surplus in 2012-13?

Dr Gruen —The forecasts are that there will be a small surplus in 2012-13, a surplus in the order of 0.1 per cent of GDP, I think.

Senator JOYCE —Point one per cent of GDP—so, a billion dollar surplus. That is about a $400 billion gross budget. So 0.1 per cent is a very small fraction. Can you tell me any cost you have had that has come within 0.1 per cent of its prediction—when you take things out to the forecast level? Have you had one forecast ever that has not varied by more than 0.1 per cent?

Dr Gruen —I suspect you do not want me to take that question on notice. But I cannot give you an iron-clad guarantee one way or another. But I am certainly willing to say that 0.1 per cent of GDP is a small surplus—there is not question about that. It is a small number.

Senator JOYCE —In the past, I have offered a bet. I have said, ‘If you can do 0.1 per cent or better, I will give you $1,000; and if it is 0.1 per cent or worse, will you give me $1,000?’

Dr Gruen —Senator, I am not in the business of engaging in public bets with—

Senator JOYCE —I am in the business of making money and I think this is a sure thing.

Dr Gruen —I am not in the business of making bets. There are both upside and downside risks to all of our forecasts.

Senator JOYCE —Give me some of the downside ones that are obviously in the news at the moment.

Dr Gruen —Downside risks that are in the news?

Senator JOYCE —Yes.

Dr Gruen —I will give you both upside and downside; I will try and be balanced. On the downside, the fiscal situation in Europe is clearly going to play out over an extended period of time and generate bouts of market volatility. The fiscal situation in Europe is very serious. How that is resolved remains to be seen. So that is, I would think, the largest obvious event going on out there at the moment that is a downside risk. On the upside, we continue to see very strong data coming out of Asia—China, but also other East Asia economies, including India. Despite recent falls in commodity prices, commodity prices remain at very high levels and in fact are consistent with further increases in negotiated contract prices for bulk commodities over the next three months. So I would say that there are significant risks in both directions.

Senator JOYCE —Bulk commodities such as what?

Dr Gruen —The main bulk commodities are obviously iron ore and coal. As to which of those has spot prices above the current contract prices, I think both of them do.

Senator JOYCE —Is there anything on the horizon at the moment that might affect our export of bulk commodities to those Asian markets—any government policy around that the industry has stated might affect their capacity to grow and export? Is there any government policy that you can bring to mind?

Dr Gruen —Certainly the industry has made statements about the resource super profits tax.

Senator JOYCE —If that affected bulk commodities—if they were right—would that affect our surplus?

CHAIR —They are not right.

Senator JOYCE —But, if their statement is right, would that affect our surplus?

Dr Gruen —I do not think that I should be speculating on whether industry statements are right or not.

Senator JOYCE —Even if it affected things to the extent that it changed by 0.1 per cent?

Dr Gruen —Our forecasts for commodity exports and for the terms of trade and for growth were put together in light of the resource super profits tax. So we were well aware of the details of the resource super profits tax when we put our forecasts together. Our forecasts for non-commodity exports I think are pretty similar to those of the Reserve Bank, which also put its latest forecasts together in light of the resource super profits tax. There will be different views about the implications of that policy on exports, but our considered view, which is the same as the Reserve Bank’s considered view, is that we are going to see very strong investment in that sector and exports.

Senator JOYCE —Okay. When you modelled it, you modelled it taking into account the resource super profits tax. Now, did that modelling show a reduction, in any way, shape or form, because of this new tax?

Dr Gruen —We do our forecasts both from the bottom up and from the top down, and—

Senator JOYCE —I will put it another way: did you forecast it would be exactly the same if the tax had not been there?

Dr Gruen —I think our forecasts were that it did not make a material difference.

Dr Morling —Senator, if I could reply. The way we do the forecasts which are most relevant to the mining sector and which you are alluding to is on a bottom-up approach, and almost all the projects we include in our forecasts for the following two years are projects that are already under construction. So if the tax were to have any effect either way, positive or negative, it would not really show up in our engineering construction forecast because of the time frame in which we are measuring the progress of these large companies.

Senator JOYCE —That is the main answer I want. So it is like the tax was not there; that is how you forecast the surplus?

Dr Morling —The tax will have no effect on our engineering construction forecast or on our GDP numbers over that time horizon.

Senator JOYCE —That is interesting. What happens if there is a negotiated settlement and they change the upload factor, the bond rate, from 5.75—

Senator Sherry —Senator, that is not an issue for the officials. You referred to a negotiated settlement—

Senator JOYCE —Okay. I will be more direct.

Senator Sherry —No, just let me finish. You referred to a negotiated settlement, which is a direct issue of policy and appropriately comes to me.

Senator JOYCE —Rightio. I will go straight to the point. Do you take into account in your revenue forecast the bond rate of 5.75 per cent that is part of the calculations of the tax that goes into the revenue statement of the budget?

Dr Gruen —Senator, you should not ask us about the revenue forecasts. We are—

Senator JOYCE —In the discussion of the surplus, do you take into account the uplift factor for the bond rate?

Dr Gruen —I guess you could ask the question, if you wanted to, of Fiscal Group about what they take into account in the surplus. But I can answer the question from the perspective of our macroeconomic forecasts. We obviously make a judgement about the implications of the tax as it was announced.

Senator JOYCE —So, if they change the tax, they change the outcome?

Dr Gruen —In principle, it could.

Senator JOYCE —Right. Thank you. The economic forecasts in table 1 of Budget Paper No. 1, on page 1-7 and repeated elsewhere, show a low in the unemployment rate of 4¾ per cent—

Dr Gruen —Yes.

Senator JOYCE —over the next four years. That is despite at least one year of above-trend growth in 2011-12 and roughly trend growth in other years.

Dr Gruen —Yes.

Senator JOYCE —The low point in the unemployment rate in recent years was four per cent, seasonally adjusted, in February-March, and the unemployment rate was at or below 4¾ per cent between July and December. What has changed in the economy that Treasury no longer believes that the recent lows in the unemployment rate can be attained over the next four years?

—There are a couple of parts to this answer. It has been our longstanding practice at least since 2002 to make an assumption that the full rate of unemployment is five per cent. We have not had any reason to change that assumption over the time. We first made that assumption to my knowledge in the first Intergenerational report which was released with the 2002-03 budget. Ever since then we have regarded that as a reasonable number for full employment. Having said that, we make an assumption which is a particular number, namely five per cent, but there is a reasonable band of uncertainty around that number. With the best will in the world, we cannot really tell whether it is five per cent or anywhere in the range, say, from about 4¾ to 5¼ per cent. The full employment rate of unemployment could in principle be outside that range.

So then the question is: how come it was possible for unemployment to fall all the way down to four per cent as it did a few years ago? The answer is that it is always possible for unemployment to fall below its full employment rate. If you have understood how the economy works accurately, then the implication of that falling below the full employment rate ought to be that inflation starts to rise. From 2006 to 2008 what we saw was the underlying rate of inflation rising from around 2½ to around 4½. As I say, there is nothing exact in any of this but the behaviour of inflation as the unemployment rate came down to four per cent was entirely consistent with those unemployment rates being inconsistent with steady inflation.

So it is not that the economy cannot generate lower rates of unemployment; it is just that if you do go below the full employment rate, you will end up with rising inflation. As a consequence of the rising inflation, interest rates went up and the economy was slowing and then of course the global financial crisis turned up.

Senator JOYCE —Obviously, we are between four per cent and 4¾ per cent. With a bit more than an 11 million workforce, that is about 88,000 people. Saying that four per cent is a more reasonable expression, what moves would we need to take in a policy direction to get these 88,000 people back into the workforce?

Dr Gruen —The important thing to note is that the four per cent unemployment rate was not sustainable in the sense that it was associated with rising inflation, and the Reserve Bank saw it necessary at that time to raise interest rates. It does not help anyone to have the unemployment rate at a level that is generating rising inflation and it is not sustainable, and that was the situation as it was.

Senator JOYCE —So, if you raise employment, you raise inflation, so you have to raise interest rates.

—What we are talking about here is what is commonly known as the NAIRU, which is the rate of unemployment you can sustain without putting pressure on inflation. As I said, there can be some discussion about what that level is, and in Treasury we have assumed for several years now that that level is five per cent, although we do not claim any particular level of precision about that estimate. It is five per cent with a margin of error around it. For the sake of the conversation, if it is the case that the NAIRU is five per cent, you cannot sustain an unemployment rate of four per cent because, when that rate comes down to four per cent, inflation starts to rise and you end up in a situation which is inconsistent with the Reserve Bank’s mandate, and so they act.

Senator JOYCE —What do you believe the NAIRU is at the moment?

Dr Gruen —Around—as I said, I do not want to make—

Senator JOYCE —Around five per cent.

Dr Gruen —Around five per cent, with some significant margin of error.

Senator JOYCE —So, if you had a stimulatory process that was excessive in the increase in employment, you would have to raise interest rates to cool the economy down?

Dr Gruen —If you ended up with any policy which drove the unemployment rate below the NAIRU then, as a consequence of that, other actions would need to be taken—whether by the Reserve Bank or by someone else—to slow the economy down.

Senator JOYCE —But, as you approached the NAIRU, you would start raising interest rates, wouldn’t you?

Dr Gruen —It would depend on a whole lot of things. One makes judgements not only about the NAIRU but about prospects in the future and about the level of the currency—there are a whole lot of things that one would take into account.

Senator JOYCE —What policies would reduce the sustainable level of unemployment?

Dr Gruen —What policies would reduce the NAIRU?

Senator JOYCE —Yes.

Dr Gruen —I think it is fair to say that the changes that Australia has made over the past couple of decades to move to away from centralised wage bargaining to more enterprise based bargaining have seen some decline in the NAIRU. Wage negotiations that are conducted on an enterprise basis usually lead to a situation where the NAIRU is lower. But this is tricky because it is also true that the accord period in the 1980s was a period of centralised wage fixing, which, most commentators agree, was also associated with considerable wage moderation. This is a tricky area and it is hard to be categorical.

Senator JOYCE —So, the more flexibility there is in the labour market, the more capacity there is for employment?

Dr Gruen —It is not that simple, as a comparison with the US at the moment would make clear. The US has a very flexible labour market and unemployment near 10 per cent. I am not necessarily disagreeing with you; I am just saying that this is not an area where we can make categorical statements. But I think most economists would agree that moving the bargaining unit so that enterprises bargain with their workers to determine outcomes creates an environment in which the NAIRU is lower than it would be in an environment in which those decisions were made at a simple level.

Senator JOYCE —Thank you for that. What are your thoughts on the statements about Australia in the OECD’s Economic policy reforms: going for growth 2010, released in March, where they said:

A 2006 reform fostered individualisation of labour relations and an independent body was created to set the federal minimum wage, taking into account its employment impact. These measures were partly reversed in 2008 through a reinforcement of the role of awards, raising the risk of increases in minimum labour costs …

Are the reversals that the OECD talks about a risk to the performance of Australia’s labour market in future economic downturns?

Dr Gruen —Sorry, can you read the statement again?

Senator JOYCE —In summary, what are your thoughts on the OECD’s ‘going for growth study’ on Australia released in March and are the reversals that the OECD talks about a risk to the performance of Australia’s labour market in future economic downturns? If you want me to go through the quote, it was, and it is talking about Australia, obviously:

A 2006 reform fostered individualisation of labour relations and an independent body was created to set the federal minimum wage—

Senator CAMERON —Back to Work Choices. That is where we are with you lot.

Senator JOYCE —It continues:

… taking into account its employment impact. These measures were partly reversed—

Senator CAMERON —We know where you lot are going—Work Choices.

Senator JOYCE —It continues:

… in 2008 through a reinforcement of the role of awards, raising the risk of increases in minimum labour costs …

CHAIR —Order! Senator Joyce, can you just stop for a moment?

0Senator Bernardi interjecting

—Senator Bernardi and Senator Cameron, can you please allow Dr Gruen to hear the question? Senator Joyce, please continue.

Senator CAMERON —We know what you are trying to do.

Senator Sherry —Sorry, Chair, I am afraid will have to ask Senator Joyce to repeat the question, because of the very unhelpful interjections from a number of senators.

Senator JOYCE —I will repeat it again. That is a good statement, Minister; we will try and keep it simple. Dr Gruen, I will have another crack at it. What are your thoughts on the OECD’s ‘growing for growth’ study on Australia released in March, where they said:

A 2006 reform fostered individualisation of labour relations—that was obviously, in Australia—and an independent body was created to set the federal minimum wage, taking into account its employment impact. These measures were partly reversed—in Australia—in 2008 through a reinforcement of the role of awards, raising the risk of increases in minimum labour costs …

Are the reversals that the OECD talks about a risk to the performance of Australia’s labour market in future economic downturns?

Dr Gruen —The OECD is talking about the setting of minimum wages, as I understand it. The claim that they are making is that that is raising the risk of minimum wages growing more rapidly or ending up higher than they were under the previous institutional arrangements. I guess my answer to that would be simply that we have the track record of the institution—I forget what the name it is—that was run by Ian Harper. Was that called Fair Work Australia?

Senator Sherry —The Fair Pay Commission.

Dr Gruen —Thank you, Senator. We have a track from the Fair Pay Commission. We do not yet have a track record from the new body that has been set up. So I guess my main answer to this is that it is too early to be making statements about risks. It is certainly the case that fair pay commissions need to take into account both the pay for the low paid and also the implications of changes in the minimum wage for employment prospects. I think that is definitely the case—that is what these bodies need to take into account—but I am not really in a position to comment on whether the new institutional arrangements for low-paid workers will generate risks for higher outcomes than under the alternative arrangements. I just think it is too early to say.

Senator JOYCE —Thank you, Dr Gruen, but you were in 2006—

Dr Gruen —I was.

Senator JOYCE —I am going to quote back to you now. Dr Gruen—you are a person I read a lot about—in a speech in 2006 stated:

Australia’s institutional settings—which include a market-determined exchange rate, medium-term monetary and fiscal policy frameworks as well as a flexible labour market—have given the economy the flexibility needed to deal with different economic shocks and helped to largely avoid problems that arose in previous terms of trade booms.

Do you stand by those comments?

Dr Gruen —Yes—I wrote them.

Senator JOYCE —Taking into account the benefits of a flexible labour market, its capacity to keep Australians employed, the uncertainties that are currently before us, the problems that the government are creating for themselves in their latest foray into nationalising the mining industry, do you believe that it would be prudent for us to have the capacity to move those people from one section of employment to another section of employment with the flexibility that actually keeps them in jobs?

Dr Gruen —Obviously I am not going to comment on parts of that question.

Senator Sherry —It was rhetoric and statement. Most of it was not a question.

Dr Gruen —The statement that you read out, which I wrote in 2006, talked about the benefits of a range of institutional features of the Australian economy, including a floating exchange rate, medium term frameworks for monetary and fiscal policy and a flexible labour market. I do think that those features, including the last one, are important features to enhance the capacity of the economy to respond to shocks. I would note that, in the most recent significant slowdown that was associated with the global financial crisis, we have seen a significant slowing in wage costs as measured by the wage cost index, especially in the private sector. That leads me to think that there is significant flexibility in the Australian labour market. But I certainly agree with the statement which says that there are significant benefits in having wage flexibility when responding to shocks.

Senator IAN MACDONALD —I thank Senator Abetz and Senator Eggleston for allowing me two minutes to ask just one question. Was any modelling done that looked at the impact of the mining tax on regional and remote businesses, the north-west mineral province, Northern Australia or anything? I am really looking at what impact the mining tax might have on communities like Cloncurry, Mount Isa, Mackay and towns in the Bowen Basin coalfields area—not so much the mining tax itself but the impact it might have on those areas. Was that sort of modelling done?

Dr Gruen —I believe a question very similar to that one was asked of Dr Henry last week. If my memory is correct, his answer was that, as far as he was aware, we had not done any modelling of the regional impact. To the extent that modelling was done, it was not released.

Senator IAN MACDONALD —I can read what Dr Henry said. He said that he was not aware if we—I assume ‘we’ means you people—

Dr Gruen —Treasury.

Senator IAN MACDONALD —‘We’ meaning you people at the table.

Dr Gruen —That is right.

Senator IAN MACDONALD —Surely someone here will know whether or not you have done that modelling.

Dr Gruen —I was just continuing.

Senator IAN MACDONALD —I am sorry.

Dr Gruen —Part of the KPMG Econtech modelling is an economy-wide model. An economy-wide model will, as part of the modelling, generate results for the disaggregated regions that are in that model. I am not fully on top of the detail of how much disaggregation is in the Econtech model, though we may well have people here who know more about that than I do. I am not aware of whether that regional dimension has been published. I do not think it has. I do not think the results from the regional analysis have been published. We could take it on notice, if you would like.

Senator IAN MACDONALD —Dr Gruen, you made the invitation, which I gratefully accept, that there may be other people in the room who have the information. I cannot believe that not one of the six top people from Treasury knows whether or not regional modelling was done. You have indicated in words that I do not quite understand that, because it is an economy-wide model, it will pick up the regional impacts.

Dr Gruen —Yes.

Senator IAN MACDONALD —So does that mean, yes, there is information? I am not at this stage asking whether I can see it. I am asking: is there work done that would indicate the impact on the regions?

Senator Sherry —We are just checking for you, Senator, to see if there is anything already available.

Mr Ewing —I should begin by clarifying that my area is not responsible for the MM900 model from Econtech that was used and so I am not the world’s greatest expert on it; however, I can tell you that—

Senator IAN MACDONALD —You are probably better than most of us on this side of the table.

Mr Ewing —To the best of my knowledge, it does not have the regional dimension that you are asking about, in that it does not have substate regions within the model. Its primary focus is on national results and industry results. Those would give you some insight into the impacts on regions, but you have to do that outside of the model rather than having a nice model that tells you that Mount Isa does this or that.

Senator IAN MACDONALD —I am not talking about Mount Isa so much as the impact on all of non-big-city Australia. It is really remote Australia where most of the mines are.

Mr Ewing —My understanding is that the modelling that was done for Treasury by KPMG Econtech does not include that dimension.

Senator IAN MACDONALD —So you disagree with what Dr Gruen said—that the economy-wide model will generate results for disaggregated regions?

Mr Ewing —I never like to disagree with Dr Gruen. There are many disaggregated results that would inform your understanding of the different regions. It is simply that the model does not do the work for you. You have to take the results of the model and apply them yourself.

Senator IAN MACDONALD —Okay. Has anyone in Treasury taken the results and applied them themselves?

Mr Ewing —My area has not.

Senator IAN MACDONALD —Perhaps I can come back to Dr Gruen.

Dr Gruen —Let me just clear up the apparent suggestion that Robert and I have some fundamental disagreement about the KPMG Econtech model. I have a broad overview of that model and Mr Ewing has a more detailed knowledge than I do. So I defer to him when it comes to what level of disaggregation—

Senator IAN MACDONALD —Mutual admiration!

Dr Gruen —Absolutely.

Senator IAN MACDONALD —Forget that.

Dr Gruen —But you brought it up, Senator.

Senator IAN MACDONALD —I am not here to play a game. I just want to know whether those economy-wide models do generate results for a disaggregated region. I am getting half answers from both you and Mr Ewing. All I want to know is what the impact is on that part of Australia.

Dr Gruen —I do understand. We are not in a position to give you definitive answers because this modelling was commissioned by the Treasury from KPMG Econtech. We in the macro-economic group did not commission the modelling. So you really should talk to the people who did commission the modelling if you want more detailed information about what is in it.

Senator JOYCE —How about a sectoral analysis on agriculture? Did you do that?

Dr Gruen —As I said, the macro-economic group did not do any sectoral analysis of the effects of the RSPT.

Senator IAN MACDONALD —I understand, from very strange circumstances, that someone in Treasury either has done that work or is aware of the answers that I am trying to get. I understand someone in Treasury knows the answer to my questions, whether it is you guys or someone else. On the assumption that it is there, is that the sort of thing that you would make public?

Dr Gruen —To be told that there is someone in Treasury who knows something and then be asked what am I going to do about it—

Senator Sherry —We have heard that line before.

Senator IAN MACDONALD —I am really not here to play a game. There is information that I want to get about the impact, not so much on the mining industry, but on all of those communities, towns and regions that are hugely impacted by the wealth or otherwise of the mining industry. I understand modelling has been done. You are saying you do not know and I accept that. Rather than waste the time of everyone here, because I am obviously not going to get much more this group at the table—or am I? Can you confirm that?

Dr Gruen —I do not have any more information.

Senator IAN MACDONALD —When you said I should ask the right people, who are the right people?

Dr Gruen —Revenue Group commissioned the modelling.

Senator IAN MACDONALD —Minister, could you take my questions on notice for the Revenue Group?

Senator Sherry —Yes, I will.

Senator IAN MACDONALD —I would be very grateful, bearing in mind that I understand the information is available. Whether or not you can release it to me is one thing, but denying that it is there or otherwise is of course quite a separate thing. I appreciate your advice, Minister, that you will take it on notice.

Senator ABETZ —Yesterday we did not quite get to the answer to this question: how much company tax and royalties did mining companies pay last year?

Dr Gruen —That is a question for Revenue Group.

Senator ABETZ —Do we have that available?

Senator Sherry —No, we finished them yesterday.

Senator ABETZ —It is just not known by Dr Gruen and others at the table?

Dr Gruen —I certainly do not know the dollar amount, but I would imagine it is available.

Senator ABETZ —Yes, pretty easily, so if somebody could look that up for us and let us know, say, after morning tea that would be helpful.

Senator Sherry —We are not going to have time imposed on us by you, Senator. I will take it on notice and I will do the best I can.

Senator ABETZ —That is why I said it would be very helpful. I am not imposing anything; I am only asking.

Senator Sherry —I will go back to Revenue Group; we will get someone in Treasury to see if the figure is available. We will get back to you as soon as is practicable.

Dr Gruen —Senator, can I get you to define as precisely as possible what the question is?

Senator ABETZ —How much company tax and royalties did the mining sector pay last year—

Dr Gruen —Last financial year?

Senator ABETZ —Last financial year.

Dr Gruen —In ’08-09?

Senator ABETZ —That would be the last financial year, yes. In relation to the pie charts that were in Mr Swan’s economic update from last month, in May, I had some discussion with Dr Henry about those charts and I understand the information for those charts went to the Treasurer’s office but the Treasurer’s office put the pie charts together. Is that correct?

Dr Gruen —Again, Senator, this is an issue for Revenue Group.

Senator Sherry —Certainly Senator Joyce and Revenue Group had a considerable exchange about this yesterday. I do not know whether you are aware of that.

Senator ABETZ —Yes, and I am just trying to follow up on those matters which were not fully nailed down.

Dr Gruen —I am sorry; it is not something that I can comment on, I am afraid.

Senator ABETZ —That is fine. If Senator Joyce has a few more questions I might let him go at this stage and I will come back to some other matters that have been raised with me.

CHAIR —I have other senators on the list—Senator Eggleston and Senator Milne.

—One of the consequences of the proposed resources super profits tax is that there is an increase in the total tax from the resource sector, and budget projections show an increased revenue of $3 billion and $9 billion in 2012-13 and 2013-14 respectively. Can you explain to the committee the reasoning behind the concept that increasing the total tax take from an industry can lead to an increase in investment and growth?

Dr Gruen —Again, I am not the expert on this; but I can make a general comment. If a tax is more efficiently designed, it can raise more revenue while generating less distortions in the sector. Certainly, that is the point of this tax. The problem with royalties are that they take no account of the profitability of the mine. In principle, a royalties regime can make mines which, in the absence of taxation would be profitable—they can render them not worth proceeding with. So, if you get rid of the royalties or if you rebate the royalties and introduce a tax which is more efficient, in principle and in practice you can generate more revenue as well as reduce the distortions in the industry.

Senator EGGLESTON —On the subject of royalties, the Premier of Western Australia, Colin Barnett, makes the point that constitutionally the states own the minerals, and the royalties are the price that the state sells the minerals to the mining companies for. So that is in fact a business cost to the mining companies. Would you like to comment on that proposition?

Dr Gruen —I need to have enough understanding of the tax to be able to make coherent macroeconomic forecasts, but I am not the Treasury expert in this area. I did not work on the Henry tax review or the AFTS team. You really need to address these questions to the people who are the experts.

Senator EGGLESTON —Nevertheless, it is a fundamental constitutional concept that the states own the minerals.

Senator Sherry —There are two issues you raise. One is the revenue issue. There was an opportunity yesterday to deal with that and, as Dr Gruen said, macro did not design the tax or do the revenue estimates et cetera—that was not their job. Secondly, you raise a constitutional issue, a legal issue. There may be someone else in some other area of Treasury but that again is right outside the parameters of the macro group of Treasury. Thirdly, I think the claims—and I would put it no higher than ‘claim’—about who owns what is a legal issue and not for macro.

Senator EGGLESTON —Thank you, Minister. But I would have thought it was fundamental to the thinking underlying this proposal and I would have thought that most officials within Treasury would be familiar with the underlying issues. They are not proposing to abolish royalties; we are talking about rebating under this.

Senator Sherry —we have well outlined who is responsible for what. What I can say is that the Commonwealth is advised that the RSPT is supported by the Constitution’s taxation power, as it is a tax on profits made from extracted resources. Resources cease to be the property of the state once they are extracted. The RSPT is levied on the resource profit made by the miner. We believe it is constitutional. The government will implement the RSPT in a way that is consistent with Australia’s legal framework, rights and obligations, and we will continue to consult with the states and territories on the issue.

Senator EGGLESTON —You said the royalties cease to be the property of the states once they are extracted. That in a way confirms my point, because at that point the states have sold the minerals to the mining companies. But we will move on from there because I can see that we are not going to get a clear and definitive answer. How confident is Treasury that the changes proposed by the government will both increase the tax taken from the mining industry and lead to an increase in investment and growth?

Dr Gruen —The basis of the statement that they would lead to an increase in investment and growth was the long-term modelling done by KPMG Econtech. For the purposes of the macroeconomic forecasts, which take us, as we discussed earlier, out to 2011-12, those forecasts are built-up from all the things that are going on in the economy. The long-term implications of the RSPT are not really relevant to those forecasts over the next couple of years. I think they are really different things.

Senator EGGLESTON —Could you perhaps explain to the committee why mining companies with international operations will not move investment and jobs to a lower taxing jurisdiction. I think that one of the things we tend to underestimate in Australia is how international the mining industry is. Other countries, like Indonesia and countries in Africa and South America, have minerals. Why shouldn’t these companies just move to a lower-taxing jurisdiction if we increase our taxes to the level we are proposing?

Dr Gruen —Again, I think this was handled by Dr Henry last week. The general point is that, to the extent that it is profitable to extract the minerals in the ground or off the coast of Australia, the design of the RSPT is such that it remains profitable. It is clearly the case with extremely profitable mines that less of the profits will accrue to miners but it is still the case that the design of the profits tax does not change the point at which the mine becomes profitable. The rate of return on capital invested should not change under the design of the RSPT. As I said, this is not really my area of expertise. I am tasked with putting together the macroeconomic forecasts, taking into account the resource super profits tax—and that is what we have done. Our judgements about the implications of that tax over the next couple of years are pretty close to the judgments made independently by the Reserve Bank when they put their forecasts together in the immediate aftermath of the announcement of the tax. We are forecasting a continuation of very high investment in mining over the next few years on the grounds that it continues to be highly profitable.

Senator EGGLESTON —Thank you. Nevertheless, a number of mining companies have cancelled plans for expansion in Australia and I think that cannot be ignored as an indicator of what might happen.

Dr Gruen —I am not sure that that is so clear. Much of the mining investment that is in our forecasts is already under construction, so precisely what mining companies are going to do with future plans is, I guess, something that is part of the process of consulting with the government. The mining companies are trying to maximise returns to their shareholders by behaving in a way that does that.

Senator EGGLESTON —No-one can predict the future, and I agree that one cannot say with certainty that various projects will not go ahead, but there are indications that that may be what happens. For example, I went to an Indonesia-Australia Business Council breakfast at UWA last week at which someone spoke about the mining industry in Indonesia. They said that the view in Jakarta now was that Australia had a higher sovereign risk profile than Indonesia as a result of the proposed introduction of this tax.

Senator Sherry —Senator, reflecting on past episodes in history and issues that have affected the resources sector, I can recall three or four. Firstly, with the proposed introduction of the tax regime on offshore oil and gas the claims at the time were that the industry would cease to exist—no investment; that would be it. There was doom and gloom—the sky would fall in; the world would come to an end. That did not happen. We heard a similar set of claims when the Mabo decision was handed down. That did not happen.

Senator JOYCE —That did kind of affect the mining industry, to tell you the truth.

Senator Sherry —We heard a similar set of claims when the gold sector was included in tax. That did not happen. The fourth set of claims that I can recall from the mining sector was that if Work Choices was repealed it would be the end of the world as well. That has not happened. We have seen an extraordinary range of doom and gloom claims over the last 20 years, and they have not happened.

Senator EGGLESTON —We will have to wait and see what the outcome of this is, because—

Senator Sherry —History is with us. On four occasions the claims that were made at the time by some in the mining sector did not happen.

Senator JOYCE —But they do not have to close down. They just have to slow down and your surplus is gone.

Senator ABETZ —That is right.

Senator EGGLESTON —That is right. We will have to wait and see, I think. I take your point; nevertheless, this does change the feeling about the safeness of Australia as a place for very large investment in mining projects. It changes perception about the profitability of those investments.

0Senator Abetz interjecting

Senator Sherry —Senator Abetz interjected with: ‘The GST.’ We made a lot of claims about the GST—

0Senator Abetz interjecting

Senator Sherry —I do not seem to recall that we made a claim that sovereign risk would be increased as a consequence of the GST. It was not true and it would not have happened, as it will not happen in respect of this tax.

Senator ABETZ —If you could have you would have. But sovereign risk does not apply to GST. That is just silly.

Senator EGGLESTON —Exactly. Sovereign risk does apply when mining companies based in London and New York or Zurich are considering—

CHAIR —Senator Eggleston, do you have a question?

Senator EGGLESTON —Yes, I do. Could you explain—

Dr Gruen —I just want to respond to the comment you made. I think it is worth responding to.

Senator EGGLESTON —Please go ahead, Dr Gruen.

Dr Gruen —It has been the case over the past quarter of a century in Australia that governments of both political persuasions have instituted economic reform, and that economic reform has at times led to costs being imposed on existing plant and infrastructure. Let me give you an example. When tariffs are cut the consequence is that existing firms in the traded sector—for example, the car industry—make less profit than they would have if there had not been a tariff change. It has been a widely accepted principle that if governments are not in a position to make any changes to tax rates or tariffs then we simply cannot do economic reform in this country.

Senator EGGLESTON —Thank you, Dr Gruen. In the case of the car industry, of course, taking away the tariffs meant the Australian—

Senator CAMERON —Is there a question?

Senator EGGLESTON —There will be at the end. Taking away the tariffs meant the Australian car industry had to go out and compete in the market; is that not the case? And they did so successfully; would you not agree?

Dr Gruen —At the time when tariffs were being cut the existing owners of the capital complained bitterly that their profits were being eroded.

CHAIR —I will now go to—

Senator EGGLESTON —I have one other question.

CHAIR —All right.

Senator EGGLESTON —There is in place a petroleum resource rental tax from which, I understand, the North West Shelf joint venture is exempt at this stage. Is there any proposal to lift the exemption of the North West Shelf joint venture from the Petroleum Resource Rent Tax?

Dr Gruen —I presume you do not expect me to answer that question, Senator.

Senator EGGLESTON —I simply put it—

Senator Sherry —It is not in the macro group.

Dr Gruen —It is not only that; I do not speculate on government policy

Senator MILNE —I want to ask some questions about Australia’s exposure to the ongoing fallout of the global financial crisis, in particular the subprime—

CHAIR —Senator Milne, I am sorry.

Senator Sherry —We cannot hear Senator Milne because of the debate going on.

CHAIR —No, I cannot hear her. If people want to have a conversation, would they please go outside.

Senator CAMERON —Yes, settle down, Barnaby.

Senator MILNE —I remain concerned about Australia’s exposure to the fallout of the subprime mortgage crisis in the US and the GFC. I want to know what our vulnerability is in relation to the Future Fund and in relation to any loans that the US Federal Reserve might have made to the Reserve Bank. I understand the Future Fund has a considerable investment in the USA. Can you tell me what percentage of that investment in the US was invested in derivatives or collateralised debt obligations and what losses the Future Fund has incurred because of that.

Dr Gruen —You have a higher estimate of the number of things I keep my head than I in fact do. We can take a question like that on notice. Do you have a copy of the budget with you?

Senator MILNE —No, I do not have those papers here.

Dr Gruen —On page 7-6 there is a table which gives the asset allocation for the Future Fund as of 31 March 2010. The categories are: Australian equities, global equities, private equity, property, infrastructure, debt securities, alternative assets, cash and Telstra holdings. So there is a breakdown there that can at least give you some information about that.

Senator MILNE —Maybe you could just take it on notice for me what percentage of the Future Fund is invested in the US, what was invested in derivatives and collateralised debt obligations, and what your estimate is of any losses to the Future Fund because of that.

Senator Sherry —The questions you are asking go to the Future Fund itself, which appeared in Finance last week. To the best of my recollection, some of the issues you have touched on were put to the Future Fund. But they should definitely go to the Future Fund. Macro do not have responsibility.

Senator MILNE —Could I just ask macro to tell me whether they think we do have ongoing exposure through the other question I asked, which was: did the US Federal Reserve loan the Reserve Bank money which it then loaned on to the banks, and what is our vulnerability about that?

Dr Gruen —My understanding is that there was a swap agreement between the Reserve Bank and the Fed, but we can certainly find out what information there is and get back to you on that.

Senator MILNE —Thank you. I have a question in relation to the G20. At the G20 meeting in Pittsburgh in September last year the Australian Prime Minister signed on to the communique, and there was a commitment to reform fossil fuel subsidies. The ministers there called upon their finance and energy ministers to prepare implementation lines and timetables. I understand there is a meeting in Korea at the end of this week at which there will be a final review of each country’s plan for the phase-out of fossil fuel subsidies. I ask Treasury now to table Australia’s submission to the finance ministers’ meeting in Korea—or to the meeting in Toronto—this week. Can you also tell me whether Treasury, in doing that work, accepts the definition of subsidies that the International Energy Agency or the OECD make, because the definition of what a fossil fuel subsidy is is going to make a big difference as to what is declared and what is phased out.

Mr Flanagan —The communique established a set of work that has been taken up by a working group. The lead agency for Australia within that working group is actually DRET, rather than Treasury, but we are participating in that working group and, obviously, have the lead in the actual meetings that will be occurring in Busan at the end of this week.

At this stage we are not in a position to table any of the inputs around the G20. As to what information will be released on those various reports, that is usually left as a consideration for the meeting itself and the ministers at the meeting. I can indicate at this stage that this meeting certainly will not be at a point where it will finalise the views for some of the issues you have touched on about definitions and what, indeed, a subsidy is. There are still issues where discussion is going on between different countries as to what the appropriate definition is for subsidy. As I understand it, the report is still very much in progress, and there will not be a resolution of these issues in Busan.

Senator MILNE —I recognise there is a contestability about the definition of subsidy, that is why I asked whether Australia—not what other countries might do, but Australia—accepts the OECD or the International Energy Agency definition of subsidy for the purposes of this international negotiation.

Mr Flanagan —I would have to take that level of detail on notice.

Senator MILNE —If you would not mind; and can you tell me if Treasury has conducted any analysis of subsidies for fossil fuels in Australia?

Mr Gruen —Not in macro group. To the extent that this has been done, it would have been done by an area that was interested in the detail of that industry. So I guess—

Senator MILNE —So who would be doing the work?

Mr Gruen —You could ask that of fiscal group, but I am not sure—it may not be them either. But I would suggest that you ask that question of fiscal group later in the day.

Senator MILNE —On who is doing—

Mr Gruen —Whether they have done any analysis—

Senator MILNE —Done any analysis of the subsidies for fossil fuels, and which ones can be eliminated et cetera.

Mr Gruen —I think so.

Senator Sherry —We will take it on notice: if any work has been done and, if so, by whom. It is certainly not macro—I think we can safely say that. I will come back to you. We will also take on notice—I am not sure which minister, if any, is representing us in Korea; I just do not know—the details of any statements or presentations that are made by whomever is attending that meeting, whether it is a minister or an official. I just do not know at this point in time? Mr Flanagan, do you know the minister?

Mr Flanagan —The Treasurer will be representing Australia, as well as the Reserve Bank governor.

Senator Sherry —The Treasurer is going—

Senator MILNE —They will both be at the Korean meeting?

Mr Flanagan —That is correct.

Senator MILNE —But you cannot tell me anything at this stage about what Australia is submitting to that meeting? I understand that in Pittsburgh there was an undertaking that there would be implementation plans and timelines. Can you at least tell me what the time line is for the phase-out that Australia is agreeing to, or proposing?

Mr Brummitt —The key thing about the time line, and in the context of your remarks about the upcoming meeting in Busan this weekend, is that the next step is the summit in Toronto. Nothing about the fossil fuel issues will be finalised within the G20 ahead of Toronto. That is why there is still a considerable degree of flux around these issues, including within Australia’s position and on definitional type issues from a whole range of countries.

Senator MILNE —I understand that this is the beginning of the process and nowhere near the end of the process. What I am trying to get to is that I understood that each country had to put in a report on progress from Pittsburgh to Busan in preparation for Toronto, and that we were expecting Australia to put in a submission as to what our timetable is for phasing out fossil fuel subsidies. Is that not correct?

Mr Brummitt —I have got that here, but I think that—

Senator MILNE —What are we committing to? Why did we sign up to anything?

Senator Sherry —I guess we will know when the minister makes the presentation on behalf of Australia at Busan. We will know at that time.

Senator MILNE —From the point of view of people around this table, who are representing the Australian people, we might have an interest in knowing whether the Australian government is committed to phasing out fossil fuel subsidies. If so, what is the time line that we are proposing to put to the rest of the world? We have a right to know that.

Senator Sherry —Beyond what we have been able to outline so far we will just have to take it on notice. Given the timing of the meeting is this weekend, I do not see that we can do anything but that.

Senator MILNE —I will put it on notice that I would like all the documents that Australia is putting forward in relation to its proposition about what constitutes a fossil fuel subsidy and the time line that Australia is committing to. You can take that on notice because you will have it in a few days time, presumably.

Dr Gruen —I can add something to earlier remarks. You were asking about the Reserve Bank arrangements with the federal reserve. In the Reserve Bank’s annual report of 2009, they have a table on page 27 in which they detail the assets and liabilities on their balance sheet. Two of the lines, one in the assets column and one in the liabilities column, are federal reserve swap collateral and federal reserve swap deposit and those numbers were both $34 billion as of December 2008 but had fallen to zero by the middle of 2009. It is probably the case that if that has changed—I am not on top of the detail—as I understand it, these were swap lines that were put in place at the height of the crisis and have since been unwound. There has not been any action on this since then. I do not want to make that as a definitive statement but that is my understanding.

Senator PRATT —The KPMG Econtech modelling says that resource investment will increase by 4.5 per cent, resource sector employment will increase by 7 per cent and resource sector output will increase by 5.5 per cent. Can you explain how it is that the RSPT achieves this goal?

Dr Gruen —I am not the expert on this.

Senator JOYCE —That would be a good explanation.

Dr Gruen —I am not the expert on this but it goes to the answer I gave to Senator Eggleston. If you compare an efficient tax with a less efficient one, what you are trying to do is get as close as possible to not distorting the decisions of the private sector. By that economists mean that if you asked the question ‘what would resource allocation look like in the absence of any taxes’, a well-designed tax will move you as little as possible from that position. In other words, the place to start is by asking: what would resource allocation look like in the absence of any taxes?

A royalties tax takes you a fair way from that no-tax world because it puts a charge on the extraction of resources by volume independent of whether or not extracting those resources is profitable. The point there is that there will be mines which can make only a small amount of money from extracting resources. With the imposition of a royalties regime, it becomes a proposition with a negative present discounted value and so you do not do it.

If you can rebate the royalties and instead put in a tax which is less distorting then the outcome can be that mines which were previously uneconomic become economic and you move closer to the world of resource allocation that would exist in the absence of tax. That is the point of the resource super profits tax: to move you significantly closer to the resource allocation that would apply in the absence of tax. So you can introduce a more efficient tax which will generate more revenue and be less distorting. That is the point.

Proceedings suspended from 10.15 am to 10.31 am

CHAIR —We will make a start again. Senator Pratt is continuing.

Senator PRATT —Dr Gruen, thank you for your explanation of the RSPT and why it should benefit the economy. It sounds like a win-win scenario for the economy overall. So why is there such an outcry from certain sectors? Who are the losers in this scenario? It sounds like the whole economy benefits, but at whose expense is that? Is it simply at the expense of those who have to pay a fair price for the resources they are exploiting if they are at the higher end of profit earnings?

Dr Gruen —I am not really the person to give answers about the RSPT. It is obviously the case that, to the extent that more tax is raised, that comes at the expense of shareholders. That is clear. In answer to your question, the tax can be more efficient, but it also means that more revenue comes to the Commonwealth.

Senator PRATT —But, as you outlined before, it should not be at the expense of jobs.

Dr Gruen —The modelling that was done by KPMG Econtech showed the situation in the long run and made the argument that economic output would be higher than without the tax. There should be no implication for jobs in the long run, simply because over an extended period of time the economy can adjust to changes in relative prices and employ the same people—at an aggregate level, not necessarily the same individuals.

Senator PRATT —In terms of the benefits flowing through to the economy, Western Australians are being pushed pretty hard with a scare campaign saying that the tax will hurt them. But, as you have outlined the principles behind this tax, there is no reason to believe that all of these benefits from investment in the mining sector will not flow through to small business across Western Australia.

Dr Gruen —Again, these are all long-run results from the modelling. But they do say that you end up in a world with higher output. As I said earlier in answer to other people’s questions, I am not aware of the regional detail of what the modelling shows, so I am not really in a position to comment on that.

Senator PRATT —One of the constraints on the Australian economy is infrastructure. I am interested in your thoughts about tax and how the economy really should be investing to address such constraints, particularly in states that are generating the wealth but our capacity to continue to do that can be inhibited by a lack of investment in infrastructure.

Dr Gruen —You are really asking me questions outside my area of expertise. As I think I said earlier, I need to have a broad understanding of this tax in order to do forecasts on the macroeconomy. Beyond that, I am not really the expert.

Senator PRATT —Fair enough. Thank you, Dr Gruen.

Senator BUSHBY —I thank members of the Macroeconomics Modelling Division for coming along to assist us. I direct you to Budget Paper No. 1, page 2-23, which shows chart A, ‘Economic growth and fiscal stimulus’ for 2009. On page 2-24 the chart is explained thus:

Chart A shows, for 2009, the relationship between the size of a country’s fiscal stimulus and the extent to which economic growth exceeded the IMF’s April 2009 forecast.

Those countries that enacted large and timely fiscal stimulus packages, including China, Korea and Australia, performed much better than expected. Those countries with smaller packages, such as the US, Germany, Canada and France, tended to perform broadly in line with expectations. The relationship shown is highly statistically significant, with a t-statistic on the slope coefficient of 3.3.

Why did Treasury only include 11 of the 19 data points that were provided in the source IMF publication?

Dr Gruen —I have a detailed answer to this question, which I am very happy to hand to you. It is long. I will not read it all out, but I will read out the relevant bits. Does it make sense for me to give you one copy of this and also give Hansard a copy?

Senator BUSHBY —You can provide it to the secretariat.

CHAIR —You can table it and it will be distributed.

Dr Gruen —I only have three copies.

Senator BUSHBY —They will make copies.

Dr Gruen —Let me read from this answer. I will table it. I do not need to read the beginning part because it basically follows on from what you have said: It states:

Professor Sinclair Davidson of RMIT has pointed out that, when the dataset includes all 19 countries of the G-20 (rather than being restricted to the 11 countries used for the regression reported … the estimated slope on the regression line is much flatter, and the coefficient becomes statistically insignificant …

Professor Davidson is correct. Before publishing the results in the Budget, the regression result for the full sample of 19 countries was checked. Unfortunately … an error was made and the erroneous conclusion was drawn that the results for the restricted sample did not differ, to any material extent, from those for the full sample.

We have done some more work. It is of interest to report results using samples of countries that are more alike than the wide range of countries in the G20. A common way to do this is to restrict the analysis to OECD countries. That also has the advantage of that more closely comparable data available. We show in this, which I have just handed out, the results if you limit the sample to the OECD members of the G20, but then we also do an analysis where you take the whole of the OECD into account, excluding those countries that were in such dire fiscal circumstances that they were forced to tighten fiscal policy on the grounds that we do not think those countries are relevant to the analysis.

If you do the analysis for the 26 OECD countries which initiated fiscal stimulus, you find that the result that we report is, indeed, statistically significant—namely, countries that engaged in larger fiscal stimulus outperformed relative to those that did less. We have a final summary paragraph:

… there is no statistically significant relationship for the 19 G-20 countries, in 2009, between the size of the fiscal stimulus … and the extent to which actual GDP growth exceeded the IMF April 2009 forecast. For the more closely comparable 26 OECD countries that applied fiscal stimulus in 2009, however, there is a statistically significant relationship, with those countries that applied more stimulus significantly outperforming forecasts relative to those countries that did less. The US Council of Economic Advisors has arrived at a similar conclusion, using different economic forecasts and different samples of countries.

Senator BUSHBY —So the chart that was in the budget papers is based on an error.

Dr Gruen —No, the chart is correct.

Senator BUSHBY —No, your putting it in there and using it was based on an error, which was that you thought you were not presenting anything different to what the full dataset would have presented. The error was that it did present something different.

Dr Gruen —That is right. We would not choose a sample of countries if we thought that that materially affected the outcome, so we had made a check that when you included all the countries in the sample it did not materially affect the conclusion. Unfortunately, one country was miscoded. We obviously check things many times over, but when we did the check we checked what was there rather than what was not there, if you get what I mean. In the checking process—

Senator BUSHBY —Essentially you are saying that it was not a deliberate thing.

Dr Gruen —No, certainly not.

Senator BUSHBY —You were not deliberately data snooping or whatever they call it.

Dr Gruen —Certainly not.

Senator BUSHBY —It was based on errors behind the scenes that led you to present that in the way it was presented.

Dr Gruen —Indeed. It was based on a check that we did. We did a check to assure ourselves that we were not data snooping, to use the language, so then we were surprised when it was brought to our attention by Professor Davidson—well, he did not write to us but he put it on his website.

Senator BUSHBY —We will come to the OECD chart in a second, but, in respect of the G20 chart, what is in the budget paper could be read as misleading in terms of what it actually represents.

Dr Gruen —I think the facts are clear, so I would not want to put—

Senator BUSHBY —No, that is right, but somebody could read that and draw a conclusion that is not necessarily correct in respect of the G20 countries.

Dr Gruen —It is a conclusion which is not robust, changing the sample of countries.

Senator BUSHBY —So what you have done, as you mentioned, is go off and look at alternative groups of countries—

Dr Gruen —Yes.

Senator BUSHBY —which might deliver the same finding, effectively?

Dr Gruen —The aim was not to deliver—

Senator BUSHBY —Did you look at any other groups of countries, having decided that the G20 was not necessarily the appropriate one even though you selected it initially for publication in the budget paper? Did you look at any other groupings of countries than the OECD as part of your analysis once Professor Davidson had pointed out the problems?

Dr Gruen —We certainly looked at the work that the Council of Economic Advisers had done, and that stands on its own. That uses, I think, a wider range of countries, but it uses a different initial forecast. It does not use the IMF forecasts; it uses JP Morgan forecasts from, I think, late 2008. So there are a range. We simply give the link to that work.

Senator BUSHBY —Did you perform a similar analysis of countries that are primarily commodity-producing countries?

Dr Gruen —No, we—

Senator BUSHBY —You now say—after the publication of the budget, when you selected a different group of countries, that being the G20—that the OECD better represents comparable countries with Australia and that is why you are choosing the OECD now. Certainly there are a lot of things in common between Australia and other OECD countries, but not all of them are commodity-producing countries that have a heavy reliance on China for buying those commodities, with the impact that that may well have had on Australia’s economy through that period. I think that, although, yes, there are comparable similarities between Australia and other countries in the OECD, they are not exact and there are other factors at play. I think that you could also do similar analyses—and I would be interested in knowing whether you have—for other groupings of countries that more accurately reflect the important economic factors that were at play over the last 18 months or two years.

Dr Gruen —The question that the analysis goes to is whether countries that enacted larger fiscal stimuluses did better than expected. To answer your question directly, we looked at the OECD—

Senator BUSHBY —That is the only one you looked at after the G20?

Dr Gruen —No. We checked that the statement that Professor Davidson had made was correct, and it is.

Senator BUSHBY —Yes.

Dr Gruen —So we did not check that G20—

Senator BUSHBY —But then you say, ‘Well, okay, G20 is inconclusive’—I guess—

Dr Gruen —Yes.

Senator BUSHBY —‘in terms of the impact of the stimulus in these particular terms.’ So you have looked at the OECD. Did you look at other groupings of countries when you were looking to find an alternative way of maybe finding the answer you were looking for?

Dr Gruen —I would not put it in those words.

Senator BUSHBY —I am not suggesting that you were trying to find that particular result, but you were trying to find the answer of what the impact might have been. Have you modelled all countries that used stimulus packages?

Dr Gruen —The problem is that you need a source for the size of a fiscal stimulus—the OECD provides such a source and the IMF provides it for the G20—so you are limited.

Senator BUSHBY —And those are the only sources that you are aware of?

Dr Gruen —I am sure you could go country by country and use their own country estimates, but what we and the—

Senator BUSHBY —With varying degrees of veracity and accuracy?

Dr Gruen —Without saying that—

Senator BUSHBY —Yes, but I could say it if I wanted to.

Dr Gruen —I wanted to say that both we and the Council of Economic Advisers took the view that, if you are going to do cross-country work, there are significant benefits in taking the data from a particular source rather than sourcing it from all over the place. So I think it was natural to look at the G20 or the OECD. We thought that it was of relevance to look at this question for the OECD. As I said earlier, had we been aware at the beginning about when you use the full set of G20 countries, we would not have published the result for the 11 countries that we published it for.

Senator BUSHBY —You are looking for your result here, the new one, just of those 11 OECD members who are also in the G20.

Dr Gruen —We tried that, and then we tried the whole OECD. Sorry, let me be completely clear so that there is no misunderstanding. We exclude from that final sample, which you will see there, the four countries in the OECD that were forced to tighten fiscal policy. We do not include those in the sample, and we explain why in a footnote.

Senator BUSHBY —Which four countries were they?

Dr Gruen —Hungary, Greece, Iceland and Ireland.

Senator Sherry —Perfectly understandable, given the recent events.

Dr Gruen —Just to give an example: in the case of Iceland, the financial system collapses in 2008 and the economy collapses in 2009, but it turns out that the outcome in 2009 is somewhat better than was expected. Given the catastrophe that they were facing, in the task of forecasting how they were going to do in 2009 it was pretty clear that they were going to do appallingly, but just how appallingly was not clear. It is a very different question from a country that is functioning properly and is in a position to initiate fiscal stimulus. So we thought that it was entirely legitimate to exclude those countries from the sample.

Senator BUSHBY —But presumably, if they were tightening their fiscal situation, the size of their fiscal stimulus would have been negative, wouldn’t it?

Dr Gruen —It would have. There is an interesting debate. If this relationship is linear, which means that negative stimulus reduces growth just as positive stimulus increases growth, then there would be no problem and you could use all the countries. But there is an interesting proposition, which may well be right, which is that, if you are in dire circumstances so that your public finances are in extremis, further fiscal stimulus simply convinces people that you are never going to pay any of it back and it does not stimulate growth. That is the proposition, which seems to me to be a perfectly reasonable one. So there is a suggestion that, when countries are in dire fiscal circumstances, fiscal contraction can actually be expansionary—and that may well be true. The problem is that that would imply that the relationship is nonlinear, and it is hard enough estimating linear relationships, let alone estimating nonlinear ones.

Senator BUSHBY —I have not had a lot of time to analyse this but—

Dr Gruen —No, I do understand.

Senator BUSHBY —but would you think that this analysis would be sufficiently robust to be published in a peer review journal?

Dr Gruen —Given my success in getting things published in a peer review journal, the robustness of one’s analysis is only part of the story.

Senator BERNARDI —Conform to the IPCC.

Senator BUSHBY —Once again, as I say, I have not had a chance to have a good look through this and think about it.

Senator CAMERON —You have got to be able to read it.

Senator BERNARDI —That disqualifies you, Senator Cameron!

Senator BUSHBY —Isn’t the literature on the impact of fiscal stimulus much more complicated than comparing data points on a scatter graph? There will be in coming years, I imagine, tomes of economic analysis written about what worked and what did not—very in-depth and complicated analysis.

Dr Gruen —I agree.

Senator BUSHBY —The causation and effect of putting some points on a scatter graph is to say, ‘This is how it worked.’ Can you say emphatically today that the stimulus is the reason for those points creating that line going up?

Dr Gruen —There are very few economic propositions that one can make with absolute certainty, and so I would say that it is a piece of evidence. As you say, there will be—in fact, one can make a stronger statement: there already are tomes being written about the effect of fiscal stimulus. We are learning more about the effect of discretionary fiscal stimulus, and lots of institutions like the IMF and the OECD are contributing to that work. We already know quite a bit about it, hence the three-Ts principle—temporary, timely and targeted.

We already have some principles which lead us to know something about when discretionary fiscal stimulus is likely to work. The only statement I would make about this analysis is that it is a piece of evidence. It does not—

Senator BUSHBY —It is a piece of evidence, but how much weight should this be given in the overall scheme of things as people analyse the effects of stimulus packages through this period? Is it a key or a minor piece of evidence?

Dr Gruen —I regard it as interesting and of some relevance that OECD countries that engaged in larger fiscal stimulus did significantly better than those that did less relative to the forecasts that were made earlier in the year. I think it is interesting and relevant but I would not make the claim that it establishes anything with 100 per cent certainty.

Senator BUSHBY —So maybe informative rather than determinative.

Dr Gruen —Those are your words. I guess the words that I chose were that it was a piece of evidence in favour of the proposition that discretionary fiscal stimulus had a larger effect on growth than the IMF expected it would early in the year, but it is a piece of evidence—that is what I would say.

Senator BUSHBY —Just a final question on this: the forecasts—so these are IMF forecasts for the OECD or OECD forecasts?

Dr Gruen —It says, I hope.

Senator BUSHBY —Source IMF World Economic Outlook. They are IMF forecasts. These IMF forecasts were published in the full knowledge of the stimulus packages of the relevant countries?

Dr Gruen —That is a good question. In most cases the answer would be: it would be in very considerable knowledge rather than necessarily full. The reason I make that statement is: in order to have implemented significant fiscal stimulus in 2009, you had to have begun the process before April. In our case, for example—in the case of Australia—we had packages, as you know, in October of 2008, December of 2008 and February 2009; those were the big ones. The December one was small.

Senator BUSHBY —They would have been aware of Australia’s situation.

Dr Gruen —Indeed. They would have also been aware of many of these countries. If it was the case that the IMF was aware of all of the stimulus, which might be a slight overstatement but nevertheless let us assume that, then this would be suggesting that the stimulus had a bigger effect than expected. That is what you would include. But another possibility, as you say, is that some of this result is a consequence of further stimulus and the fact that that also had a positive effect.

Senator Sherry —You referred early to relevant comparisons to Australia. I think that the most relevant and most interesting comparison is with Canada. It is a similar economy. There are obviously differences, but it is certainly the most relevant of the advanced economies. Canada has a fiscal stimulus of slightly less than two per cent, looking at the original graph, and it made no apparent difference. Australia’s stimulus package did make an apparent difference.

Senator BUSHBY —I would suggest that to draw any conclusions out of that—and I would be interested if any of the macro guys think that I am wrong—you would need to do a far greater analysis than just look at those two points. You would need to look at where they started from and look at the composition.

Senator Sherry —I am just looking at the data that we have in front of us in the budget paper and the data tabled. I am familiar with the outcomes in Canada.

Senator BUSHBY —I know that. But you also need to look at where they started from, the composition of their economy and a whole host of factors that would have interplayed in that.

Senator Sherry —Sure. But your reference earlier was about what the most directly comparable country to Australia among advanced economies is. With Canada, sure there are differences.

Senator BUSHBY —I would expect Canada to be in the range of economies that you would include if you were going to do any meaningful analysis.

Senator Sherry —Sure. But I cannot think of any other economy that is closer to ours. They are obviously not identical.

Senator BUSHBY —In terms of the reliance through this period on commodities, I would have thought that Brazil, South Africa and a number of other countries like them would had have some direct relevance as well, but we will not go on to that. One question that is sort of related to that: has Treasury done a similar analysis on the relationship between the stimulus and unemployment?

Dr Gruen —No.

Senator BUSHBY —Is that something that you think would be of value that may well provide interesting evidence as well?

Dr Gruen —It is possible. But countries started from very different places, so that comparison would be more complicated. You could use the change in the unemployment rate over some period of time.

Senator BUSHBY —The main intention of the stimulus, as enunciated by government members on many occasions, was to save jobs. Surely a comparison of the circumstances with unemployment would be quite useful to the extent that this is interesting evidence in terms of the overall debate.

Dr Gruen —We did what we did because I am not sure whether the IMF or another international agency made forecasts of unemployment early in the year. They certainly made forecasts of growth, but I am not just aware as to whether they made forecasts of unemployment. I am not saying that it could not be done.

Senator BUSHBY —I will leave that one with you. Minister, I was thinking about Canada and had an opportunity of 30 seconds or so to run that around in my mind. The fortunes of Canada are very closely linked to the United States, whereas ours these days seem to be far more closely linked to China. The performance of China and the United States throughout the period were very different. That is a glaring and obvious example of why things might be different.

Senator Sherry —There is certainly a North American impact. But with Canada there is certainly an Asian impact as well.

Senator BUSHBY —Absolutely. But the US is far more important to Canada than it is to Australia.

Senator Sherry —There is no doubt about that.

Senator CAMERON —Dr Gruen, this morning I happened to catch an interview with Mitch Hooke, the Chief Executive Officer of the Minerals Council, on Sky. Mr Hooke used words to the effect that Treasury had to get out of its ivory tower and engage in the real world because they do not understand the realities of tax and the effect on the mining industry. How long has Treasury been giving advice to governments on tax?

Dr Gruen —I suspect that Treasury has been giving advice to governments on tax since 1901.

Senator CAMERON —Since 1901?

Dr Gruen —I would imagine—I was not there.

Senator CAMERON —Do you agree with the proposition that you are in an ivory tower and isolated and do not understand the realities—and by ‘you’ I mean Treasury—when it comes to dealing with tax issues?

Dr Gruen —I am not sure that I want to engage in a slanging match with Mitch Hooke. Speaking for the macroeconomic group, part of the process of putting together forecasts involves doing extensive business liaison—in other words, going out and talking to business about how they see the world. We certainly do not simply rely on evidence from our own analysis or from Australian Bureau of Statistics releases. We also look at survey evidence that comes directly from consumers or businesses and we go out and talk to businesses. If you are asking the question from our perspective, it is certainly not the case that Treasury sits in Canberra and never takes any interest in the fortunes of real businesses or real people. We do that.

Senator CAMERON —There is a website called ‘Keep Mining Strong’, which is, I suppose, the propaganda organ of the Minerals Council. They make a number of assertions, and I would like to test some of those assertions from a macroeconomic perspective. There is a blog that has some prominence on that ‘Keep Mining Strong’ website from Ivor Ries from the Eureka Report. He says:

The Rudd government has been keen to spin the message that proposed Resources Super Profits Tax will not affect how international investors perceive Australia. Rudd also claimed that the recent selloff in the Australian dollar is part of turmoil in global markets. Of course, both assertions are complete bollocks.

He goes on to say:

I’ve run a quick check on the exchange rates of alternative investment destinations and it’s clear that Australia is now being shunned in favour of stable, low-risk investment alternatives such as Mozambique, Thailand and Somalia.

Senator Sherry —I wouldn’t be paying this bloke for advice, I have to say.

Senator CAMERON —He says:

And you can see why. Despite the fact that they are currently engaged in civil wars or that the only growth they are seeing is in piracy, their governments aren’t about to start expropriating the profits of their key export industry.

Maybe because they are too busy fighting pirates and too busy fighting civil wars! This is the sort of rhetoric that is on this website. But there are a couple of important points that have to be addressed. While Mozambique, Thailand and Somalia are out there fighting drug cartels and civil wars, I suppose that they are not going to be thinking about imposing fair taxes. The argument that is put up here is the assertion that the European turmoil has had no effect. He says that to say it has is bollocks. Can you take us to what the view of the macroeconomics group is on that? What has been the effect of the—

Dr Gruen —I have to admit that I do not follow the Somalian currency, so I cannot tell you what has happened to the Somalia currency—or the Mozambique one. I cannot even tell you its name. But let me make some remarks about forces on the Australian dollar. Taking you back to late 2008, in the aftermath of the collapse of Lehman Brothers, there was a big rise in risk aversion—that would be one way of putting it. There was a huge rise in risk spreads all across the financial markets and big rises in risk aversion. One of the ways that that manifested was in falls in commodity prices. Another way that it manifested was in a very sharp depreciation of the Australian dollar.

The Australian dollar is a highly traded currency. One of the things that was observed at that time was that the Australian currency fell by more than the currencies of other commodity exporters—for instance, Canada. In 2008, at a time when global risk aversion was rising strongly, we saw a decline in the Australian dollar that was quite rapid and quite substantial. It was larger than the decline in the Canadian dollar. It is a general proposition that, when risk aversion rises in global financial markets, commodity prices tend to come down and the Australian dollar tends to come down.

The period since the sovereign debt worries, particularly in Greece but also in other peripheral European economies, has also seen a rise in spreads—nothing like to the extent that we saw in 2007 and 2008 but nevertheless spreads of things like the 90-day bank bill over the overnight index swap or the LIBOR rates over the overnight index swap have risen somewhat. So there has been a rise in risk aversion in global financial markets. There has been some fall in commodity prices. And there has been a fall in the Australian dollar. That pattern is consistent with what happened in 2008, but on a much smaller scale.

Senator CAMERON —I want to get your views on some of the other assertions that are made by the Minerals Council on this website. They ask ‘What does it mean for me?’ for anyone who is reading it. They say:

This is a tax that, if implemented, seriously threatens Australia’s competitiveness, jeopardises future investments and will adversely impact the future wealth and standard of living of all Australians.

It says:

The tax will place ‘additional upward pressure on coal and gas prices, increasing energy costs further’.

That is a quote from Grant King, the Origin Energy managing director. What is the view of the macroeconomics view on those assertions?

Dr Gruen —Dr Henry addressed this question a week ago when he said that a resource rent tax should not put upward pressure on prices. He answered that question. The reasons for that are laid out. The economic analysis surrounding this tax is laid out in the Henry tax review, so I do not think that I need to add to that.

Senator CAMERON —Another proposition on this part of the website is that interest rates could rise. They quote the financial commentator Terry McCrann saying that what is being proposed is ‘nationally suicidal’. Is there any evidence to back up this observation from Terry McCrann?

Senator BERNARDI —The fact that interest rates have been rising is one.

Senator CAMERON —This is about interest rates rising because of the superprofits tax.

Dr Gruen —I do not see the link. It is not clear to me why interest rates would rise as a consequence of the resource superprofits tax. I do not comment on suicide.

Senator CAMERON —There is another proposition on the same Minerals Council website. It says:

The tax could weaken property markets, impacting on the value of your home or property investment.

Was there any analysis done on this?

Dr Gruen —Again, I do not see the link. I have not seen analysis by Terry McCrann or anyone else explaining that link.

11:09:39

Senator CAMERON —It goes on to say that it means more money for other countries and less for Australia. Is there any evidence that that is a valid proposition?

Dr Gruen —Given my answers to previous questions, no I do not think so.

Senator CAMERON —One of the other assertions is that the shareholder or superannuant says the mere announcement of the government’s super tax on resources wiped billions of dollars off the value of those shares in just one week. Is there any evidence that that is a correct statement?

Dr Gruen —We have certainly had a look at resource prices in Australia and compared them with other countries, and the broad conclusion we draw is that resource price indexes in Australia have fallen pretty much in line with declines in commodity prices, as measured on the London Metal Exchange, and that if you take a broad aggregate of Canadian, US and Brazilian resource companies they have also fallen roughly the same, with a pattern that looks very similar. In other words, both indices have fallen roughly in line with declines in commodity prices as measured on the London Metal Exchange. I should add, these are simply broad patterns. One would expect some effect from the resource profits tax on share prices, but there are a lot of other things going on and those things are quite important. So declines in commodity prices have always had a very profound effect on resource share prices, understandably.

Senator CAMERON —The Minerals Industry Council, on this website, has a question: what is the tax? And they ask: what is a super profit? They say:

From the name, ‘Super Profit’, you would think the new tax targets only very large profits.

In fact the tax targets any profit that’s more than 6 percent - or about the return anyone could make from a term deposit at a bank.

So the name ‘Super Profit’ is misleading because it suggests it is only targeting excessive, windfall profits. In reality it will hit normal profits-not just ‘super profits’.

Is that an accurate statement?

Dr Gruen —I think Dr Henry has dealt with this in his ABE speech and it is certainly not the case that the tax applies only to profits above the government bond rate. The relevance of the government bond rate is to do with what is an appropriate discount rate to use for flows of income through time that are certain. But this is all dealt with, in some detail, in Dr Henry’s speech to the Australian Business Economists—I think a week after the budget—where he goes through an explanation of why it is the case that the use of the government bond rate in the resource super profits tax is not the rate beyond which tax is applied.

Senator JOYCE —Do you know what the federal government’s gross debt is?

Dr Gruen —I can put my hand on it—I will let you go ahead, it is just that this is really the fiscal group’s area of expertise. It depends on what we are talking about.

Senator JOYCE —It is about the analysis.

Dr Gruen —If you have not seen the budget papers, I presume this is the number.

Senator JOYCE —What is the gross?

Dr Gruen —Total interest-bearing liabilities as of 2009-10—that is presumably still a forecast—

Senator JOYCE —It is.

Dr Gruen —It is table 2 in statement 9, and the number for 2009-10 is $166.6 billion.

Senator JOYCE —What are the states’ debts at the moment?

Dr Gruen —These are questions you should address to Fiscal Group.

Senator JOYCE —Why in budget papers does Treasury only present net debt data for the Australian government general sector whereas other countries are presented as total government debt?

Mr McDonald —I believe that if you go to Budget Paper No. 3 there are tables at the back of that that present both gross and net debt based on the Australian government, state and local government, and public corporations. Those are questions that the commonwealth and state relations division of Fiscal Group would be able to address in further detail, but that data is presented.

Senator JOYCE —If other countries broke up their debt into 15 different components they could end up with a low debt at a federal level, but it is not really the case, is it? You have to look at the total debt of all your sectors that are under the auspices of the term ‘government’.

Dr Gruen —It depends on which question you are interested in answering. The Commonwealth government’s balance sheet is obviously something upon which the Treasury reports, and that is obviously something that is of considerable relevance. There are many federal systems out there and, as Mr McDonald said, the data that you are talking about are in the budget.

Senator JOYCE —If, for instance, a state in Australia were unable to repay its debt, what would happen to the state?

Dr Gruen —I think, again, it is best to address these questions to Fiscal Group.

Senator JOYCE —Fair enough. Treasury included state government debts in its publication entitled ‘A history of public debt in Australia’. I saw that on page 5. If you could do it for Treasury staff papers, why can we not do it for the budget papers?

Dr Gruen —I think the best thing to do is address this question to Fiscal Group.

Senator JOYCE —I will go back to monetary policy in that case. Is there a trade-off between fiscal and monetary policy?

Dr Gruen —There can be a trade-off, certainly.

Senator JOYCE —There ‘can be’ or ‘generally is’ a trade off?

Dr Gruen —Give me a specific example and I will try to deal with it.

Senator JOYCE —If I jam a heap of money into the economy and stimulate it, will it have inflationary pressures?

Dr Gruen —The answer to that question depends very much on whether there are unemployed resources in the economy. If you were to engage in fiscal expansion at full employment then that fiscal expansion would be crowded out by a combination of higher exchange rates and higher interest rates as applied by the central bank. So if you were to engage in discretionary fiscal stimulus at a time of full employment then the implications of that would be that monetary policy would likely offset it with higher interest rates. It is worth drawing the distinction. In a situation as we faced in late 2008 and 2009, when there was a very substantial retreat in private sector demand, both fiscal and monetary policy were acting extremely quickly to try to offset that decline in private sector spending, so they were both acting in concert to limit the extent of the economic downturn.

Senator JOYCE —But there is still a form of stimulus expenditure going on right now.

Mr Gruen —It is certainly the case that the packages that were put in place in 2009 have a profile of spending which continues at present, as you say. But it is relevant to make the point that if you are looking at contributions to growth the fiscal stimulus made a substantial economic contribution to growth from the December quarter 2008 and through 2009. Our estimates are that fiscal stimulus will subtract one per cent from growth in 2010 and three-quarters of a per cent in 2011.

Senator JOYCE —We are currently borrowing money from overseas right now to pay for things that are part of a stimulus package, such as the Building the Education Revolution and pulling ceiling insulation out of roofs. So we are still currently spending money that was earmarked for stimulus purposes, and we are borrowing the money from overseas. The question is, should we be doing that if we are also jacking up interest rates?

Mr Gruen —I guess we need to go back a little bit. At the time when the economy was weakening, both fiscal and monetary policy were employed to try and support the economy. So interest rates were cut very substantially from 7.25 down to three, and fiscal expansion was put in place. Now, there is an important difference between fiscal and monetary policy which is worth keeping in mind in trying to think about this. When you put in place a fiscal stimulus package, you commit to spending and transfers over a particular period. If nothing else changes, if you then do not touch anything, that stimulus goes away because the spending is made, it has an effect on the economy and then the spending gradually declines. The effect on the economy is that in the short run you make a contribution to growth and then as the stimulus is being withdrawn it gradually detracts from growth. That is different from monetary policy. If you cut interest rates to three per cent, you need to bring them back up again in order to generate the same effect as you do with fiscal policy. In other words, to get a stimulatory effect in the short run and then to withdraw that stimulus requires that you cut interest rates, keep them there for a while and then bring them up again. So fiscal policy by the way it is designed has both the early stimulus and the later detraction from growth built into the design. In the case of monetary policy, in order to replicate that feature you need to cut interest rates and then put them back up again. So both monetary and fiscal policy were contributing to growth from late 2008 till about the end of 2009 and now they are both subtracting—well, monetary policy is actually probably not subtracting from growth yet but fiscal policy is.

Senator JOYCE —So you are saying that the money they are spending on the school halls is detracting from growth at the moment.

Mr Gruen —It needs a slightly longer sentence. To the extent that you spend less, let us say in 2010, than you spent in 2009, that detracts from growth. That is the relevant thought experiment. My colleague has just reminded me that the way to think about it is that the spending continues to contribute to the level of GDP but it is detracting from the growth rate. I hope that is helpful.

Senator JOYCE —So what do you think is happening in the economy now?

Dr Gruen —A lot of things.

Senator JOYCE —But what in particular? Do we need to be spending money to stimulate the economy, or should we be slowing the economy down because it is becoming inflationary?

Dr Gruen —I think it is appropriate for fiscal policy to be detracting from growth, at present, because I think the whole design of these packages was to support the economy when the private sector was in retreat. Now that private spending is recovering it is appropriate for fiscal policy to be gradually withdrawing the stimulus, and I think that is what is being done.

Senator JOYCE —Why do we have to have this gradual withdrawal? Basically, if we are getting touched with the money we are spending anyhow—and that is becoming completely evident; we are paying way over the market for what we are getting, and up to 300 per cent on what the actual costs should be—instead of throwing this money away, why don’t we just stop spending it?

Dr Gruen —I am not going to comment on the efficacy or otherwise of the spending; it is not my place to do that. But the general macroeconomic proposition that you would design a package which contributes to growth when the economy is weak and then gradually reduce that stimulus I think is best practice. I do not think anybody recommends that you build up the stimulus and then just stop it immediately, because I think that would have a very substantially deleterious effect on economic outcomes. To give you an example: the cash payments that were paid in December 2008 and over a few months in 2009 had a very noticeable effect on retail trade, and as that effect has faded retail trade has become quite soft. So the point is that there are signs in the economy already of the effect of the withdrawal of stimulus. If you look at the estimates for the budget underlying cash balance it is a pretty rapid withdrawal, which of course takes into account not only the ending of the discretionary stimulus but also the improving state of the economy. So the automatic stabilisers are in there as well. Nevertheless, if you compare the rate at which the underlying cash balance is forecast to improve, it is a lot faster than coming out of either the early eighties or early nineties recession. So I think what I would argue is that the timing of the fiscal stimulus this time around was significantly better than it was in the previous two big downturns that we had, and that it is being withdrawn at a reasonably rapid pace.

Senator JOYCE —I have got a problem with that statement. When you say we are withdrawing it, why on earth, if that is the case, have we moved forward all the capital expenditure on such things as roads—I think, at one point, $5 billion of it—from almost one and two and, in some cases, possibly three years out, into this current year?

Dr Gruen —If I understand your question, when I say withdrawing I guess what I am saying is: to the extent that you, in year 1, spent a certain amount of money and then in year 2 you spent less, that would stimulate the economy in the first year. Then, in the second year, it would continue to have an effect on the level of real output, but that effect would be smaller than in year 1, and therefore it would be detracting from growth; I think that is all I am saying.

Senator JOYCE —But what we have actually done seems counterintuitive to what you have told us. What the government has done is to reach forward into the future years, grabbed expenditure on such things as the Ipswich Motorway, payments to local councils and a whole range of other projects and moved all the payments into this year. If we are trying to withdraw from stimulus, that is doing completely the opposite; that is turbocharging stimulus.

Dr Gruen —You have to add it all up. You have to take into account the full package of measures and then ask the question—which is what we do when we are putting together our macro economic forecasts. We make an assessment of how much each of the different measures will stimulate growth in output and we also put together an estimate of over what time period they will have an impact. We add them all up and then we ask the question: in aggregate what are these packages doing to the level of output through time? As written in the budget, in statement 2—I will just refer to the numbers—our assessment is, based on our estimates of the effects of the total fiscal stimulus package, that through 2009 they contributed two per cent to growth, through 2010 they are going to subtract about one per cent and through to 2011 they are going to subtract about ¾ per cent. They are continuing to contribute to the level of output; they are just reducing its growth rate.

Senator JOYCE —Why would we have a budget position that, two years ago in the middle of the global financial crisis, put forward payments on capital expenditure projects and now, when we get the statements—even by Dr Henry, who says that as far as Australia is concerned the global financial crisis is over—we would therefore reach forward to predict expenditure projections that we made in the middle of the financial crisis? And now that we are out of the financial crisis, so Dr Henry tells us, we are reaching forward, grabbing those payments and putting them into this year?

Dr Gruen —I am not certain what you are referring to.

Senator Sherry —I think he is effectively recycling an earlier question, which I think was answered, to the extent that the details in the earlier question were the responsibility of the macro group. The macro group does not have detailed knowledge of particular construction or highway projects that you were referring to.

Senator JOYCE —If we go to Budget Paper No. 2 page 172, there is a section that talks about roads.

Senator Sherry —What page was it again?

Senator JOYCE —I was given page 172, but I do not think that is it.

Senator Sherry —This is budget measures. I have ‘Adventure playgrounds’ and ‘Bulk verification of community housing rent’. Is that where you want us to go to?

Senator JOYCE —That is not the one.

Senator Sherry —I am sorry, but I have just been told—

Dr Gruen —Do you want the Ipswich Motorway?

Senator JOYCE —Yes, the Ipswich Motorway. What page is that on?

Dr Gruen —272.

Senator JOYCE —At page 272 you can see that the nation building programs were moving all these payments forward—for example, Ipswich Motorway. Those predictions were made when the financial crisis was on. Now that the financial crisis is off, we are moving the payments into this year and creating a stimulatory effect, which is an inflationary effect, which puts up interest rates. Why would we be doing that?

Dr Gruen —I am not going to give an answer in particular about the Ipswich Motorway because I do not know that level of detail. If you want that level of detail you would need to talk to the fiscal group. But I can certainly answer the kind of general proposition. The general proposition goes to the chart that I was talking about earlier in statement 2 of Budget Paper No. 1, which simply summarises Treasury’s view of what the total effect of the stimulus packages is when taken as a whole—adding up all the pieces, including the cash payments, the Building the Education Revolution and various other pieces of it—

Senator JOYCE —Marvellous bits of work.

Dr Gruen —You are going to ruin my train of thought, Senator.

Senator CAMERON —Senator Joyce, I am in charge at the moment so just behave yourself.

Dr Gruen —So the—

1ACTING CHAIR interjecting

0Senator Cameron interjecting

Senator Sherry —You are interrupting the witness’s train of thought very definitely now. Please, give him a go.

Dr Gruen —When we do that based on all the measures in this budget and all the measures that were announced previously, our assessment is that fiscal policy is contributing, as I said, two per cent to growth through 2009. It also made a contribution in 2008 but nevertheless that is the situation in 2009 and then subtract about a per cent in 2010. So the turnaround, if you like, in its effect on growth between 2009 and 2010 is three per cent of GDP. It is a very substantial turnaround. You could argue that you would like to see an even bigger turnaround. I think, if you make this turnaround big enough, you will stall the economy and that is the reason for wanting to do this at a measured pace.

Senator JOYCE —It is all very confusing that in the time when the financial crisis was on we had projections of the expenditures that went out. Now the financial crisis is over and we should be reducing the stimulatory effect rather than do that we have gone and found $1.5 billion worth of expenditure and jammed it in this year. I put to you this question: it has nothing to do really with a desire to affect inflation or interest rates or an observance of monetary or fiscal policy, this has everything to do with the government bodging up the figures to make the highest baseline possible for their two per cent expenditure commitments. They put that priority way above any of their diligence to look after monetary or fiscal policy or the effects on the economy.

ACTING CHAIR —Senator Joyce, there is a point of order from Senator Cameron.

Senator CAMERON —The point of order is that Senator Joyce cannot ask Dr Gruen to speculate about the government’s position on this. It is not his position to speculate. It is a hypothetical question and it is not in order.

ACTING CHAIR —It is up to the minister presiding to say that.

Senator Sherry —It is actually not but I had intervened anyway because you were allowing what was a polemic political statement or argument totally devoid of any coherent concise question to ramble on—

Senator JOYCE —That is your opinion.

Senator Sherry —That is my opinion and it is true.

Senator JOYCE —Everybody understands it completely. Have you bodgied up the books just to get—

Senator Sherry —Dr Gruen has already responded to the same question on two previous occasions. What you have done on this occasion with your third attempt at a so-called question is to add a whole range of political argument and rhetoric. If you want to waste the time of the committee that is up to you but Dr Gruen will not be responding to political argument and rhetoric. He will respond to questions.

Senator JOYCE —No, he had responded. We are talking about the stimulus—

Senator Sherry —He has already responded to the same issue on two occasions already.

ACTING CHAIR —Thank you, Minister. Perhaps we could ask Senator Joyce to refocus his question.

Senator JOYCE —I refer to a Treasury staff paper titled ‘The effectiveness of fiscal policy in Australia—selected issues’ written by Blair Comley, Stephen Anthony and Ben Ferguson. Are you aware of this paper?

Dr Gruen —Yes I am.

Senator JOYCE —This paper investigated the 10-year bond rate real interest margin between Australia and the United States. The paper concluded:

The results suggest that a deterioration of the headline balance of one per cent of GDP is associated with an increase in the margin of around 20 basis points in the short run …

The paper further concludes:

… an increase in public debt of one per cent of GDP is associated with an increase in the margin of around 15 basis points in the long run.

Would you generally accept the broad directions of this paper’s conclusion?

Dr Gruen —We have taken another look at that paper with the benefit of further data. We find that when you update that paper the short-run effect becomes statistically insignificant and the longer run effect becomes smaller. It is obviously a question that we have considerable interest in. It is a question that is interesting a lot of countries at the moment. I would draw your attention to an IMF staff paper from November 2009 just so that you or your staff have a chance to look it up. It is titled ‘The state of public finances cross-country fiscal monitor: November 2009’ and is produced by the IMF. That comes to broad conclusions which I think are a little smaller than the ones that that Treasury paper came to. Nevertheless, it comes to the conclusion:

An increase in the overall fiscal deficit of 1 percent of GDP pushes up bond yields by about 20 basis points over the medium term.

They have a range of other conclusions, some of which are certainly of interest. For instance, if you have a large initial high stock of debt then the effect can be bigger; if you have a large initial deficit, the effect can be bigger. There is a range of things that can make the effect bigger.

The other point that they make, which I think it is extremely important, is that these effects are effects that you would expect to see over an extended period of time, and they are not effects that you would expect to see at a time when there is a huge amount of excess capacity in the global economy. So let me just flesh that out a little bit, because it is quite important. There has been, as you would be aware, a very substantial deterioration in fiscal positions of most of the advanced world, so there have been very big increases in fiscal deficits across the developed world and in debt levels.

Senator JOYCE —Believe me, Dr Gruen, I am aware of that more than most people.

Dr Gruen —Indeed you are. If you were to simply apply these rules of thumb then that would lead you to the conclusion that bond yields across the world should have gone up very substantially. In fact, if anything, in the advanced economies, putting aside the ones where solvency is becoming an issue—the peripheral European economies—in Germany, the UK, the US, Japan the bond yields in those countries have come down. Bond yields in Germany are currently the lowest they have been since the 1920s despite the very big increases in debts and deficits.

The point is, the reason I am expanding on this in some detail, is that at a time when there is a great deal of spare capacity in the global economy, or in other words at a time when the private sector has retreated very substantially and has raised its savings and reduced its investment, the big increases in government spending and big increases in government deficits have had almost no impact at all on long-term interest rates. So the results that you get out of these econometric studies, whether you are talking about the Comley et al one, or the ones from the IMF, those are results that you would expect to apply in the medium to long run when the private sectors have recovered.

The point of all of that is that it is therefore important for fiscal consolidation to occur at the same time that the private economies are recovering. That is precisely what is happening here, and is also what is happening increasingly around the world. Some countries are doing their fiscal consolidations earlier than others, but there is no question that if these levels of debt and deficit were allowed to continue into the indefinite future, they would have very substantial impacts of the sort that you have been talking about on long-term interest rates. They are just not having those effects now because of the huge amount of spare capacity in the global economy.

Senator JOYCE —There are so many more questions that that answer leads to. On the trajectory of debt that Australia is on at the moment, which is between $1¼ billion and $2 billion extra a week—

Senator Sherry —Which debt are you referring to? Government debt or—

Senator JOYCE —Gross government debt.

Senator Sherry —Gross, not net?

Senator JOYCE —Not net.

Senator Sherry —Not net, it is gross. Okay.

Senator JOYCE —Your debt, Nick. The debt you are borrowing from overseas.

Senator Sherry —Just for the record, we had gross government debt three years ago. We were borrowing overseas three years ago when you were in government, which I have to say surprised some of your colleagues when I informed them of that fact.

Senator JOYCE —Now between the state Labor governments and the federal government we are about $300 billion in debt. If we keep borrowing money like that, Dr Gruen, are we going to put upward pressure on interest rates?

Dr Gruen —The statement that I was making was that as the private sector recovers, it will be important for—I guess the measure that I would look at the first would be the measure of net debt as a proportion of GDP, because I think that is a more comparable way to—

Senator JOYCE —In doing that, can you explain for the purpose of the Hansard what makes up net debt?

Dr Gruen —Net debt is—

Senator JOYCE —Start with what the gross debt is, then list the items that are going to come off it to come to your net debt.

Dr Gruen —Sure. My colleague has helpfully given me the—

Senator JOYCE —Just tell me the big ones.

Dr Gruen —It is the sum of deposits, government securities, loans and other borrowings minus the sum of cash and deposits, advances paid and investments, loans and placements. So it takes off—

Senator JOYCE —Give me an example of what sorts of things are.

Dr Gruen —That you take off?

Senator JOYCE —Yes, so we can identify them in the budget. What would we be looking at? What would be the sorts of things we would be taking off to come up with a net figure?

Dr Gruen —For instance, you would take off the debt-like instruments that the Future Fund holds.

Senator JOYCE —Ah, the Future Fund! Now what is the Future Fund there for, Dr Gruen? What is the Future Fund there to pay for?

CHAIR —Senator Joyce—

Senator JOYCE —No, this is a very important question: what is the Future Fund there to pay for?

Dr Gruen —The Future Fund, as it was set up, is designed to fund the liabilities from public sector superannuation from 2020 onwards.

Senator JOYCE —So we are going to pay our debt with public superannuation money, are we?

Dr Gruen —Sorry, I did not follow that.

Senator JOYCE —So when you were netting it off, there is a presumption that we would be paying our debt with public superannuation money?

Dr Gruen —No, there is not. There is a presumption that you follow the accounting rules as applied by—

Senator JOYCE —This is very—

CHAIR —Senator Joyce, I think there will be—

Senator Sherry —Senator, the treatment of the assets in the Future Fund under this government is no different from the treatment of the Future Fund assets under the previous government. It has been totally consistent; the definition is totally consistent—

Senator JOYCE —What other things—

CHAIR —Senator Joyce, I think you will have time to follow this up later. Senator Boswell has been waiting a while.

Senator BOSWELL —You would be aware of other modelling and critiques of your modelling for complementary policies for greenhouse gas emission abatement and the national regional employment consequences. A report from the Australian Conservation Foundation and the Australian Council of Trade Unions, prepared by the National Institute of the Economic and Industry Research states:

Whether Australia continues to avoid the need for financial reconstruction is the elephant in the room and the current structural weakness in the Australian economy could generate a balance of payments crisis at any time over the next decade.

Is the ACTU correct in painting this very alarming picture?

Dr Gruen —I was not sure what the structural weakness was that they were talking about. Could you explain it?

Senator BOSWELL —I will repeat the question. The Conservation Foundation and the Australian Council of Trade Unions, in a report prepared by the National Institute of Economic and Industry Research, states:

Whether Australia continues to avoid the need for financial reconstruction is the elephant in the room and the current structural weakness in the Australian economy could generate a balance of payments crisis at any time over the next decade.

Do you—

Dr Gruen —Okay, I think I understand. Without having read that report, I presume that what they are talking about is that Australia for a long time has been running a current account deficit, and it is certainly the case that Australia has run a current account deficit every year, with odd exceptions, for a very, very long time. I think the last time we ran a current account surplus was 1971 or 1972. It is also true that the current account deficit, as a share of GDP, since the mid-eighties has been of the order of 4½ to five per cent of GDP on average. Another way of saying that is Australia has been investing more than it saves; as an economy, we have been investing more than we save for a very long time. I would not necessarily call that a structural weakness. It means that it makes sense for us to keep our public finances in order and it is important that we have effective regulation around the flows of income that go in and out of the Australian economy.

Senator BOSWELL —So you do not think it is an alarming picture from the ACTU?

Dr Gruen —Without further information, I am not certain what they are talking about, but if they are talking about the fact that Australia has run a current account deficit for a very long time then that is true and I think it is something that needs to be watched, but I do not think it is a sign of a balance of payments crisis any time in the next decade.

Senator BOSWELL —The report also states:

An increasing balance of payment deficit raises the question of finance. Will overseas lenders be willing to continue their present high rate of lending to the Australian banks?

Is this a legitimate concern expressed by the ACTU?

Dr Gruen —When it comes the financing of the banks, there is no question that the banks do do a lot of offshore borrowing. There are a couple of things here. Firstly, they swap it back into Australian dollars so that the banks do not have a currency mismatch, a currency exposure. The fact that that is in place has been tested on many occasions when the Australian dollar has moved by large amounts, and it is very clear that that those hedging practices do indeed insulate the banks from foreign exchange fluctuations. The other part of that is that, as a consequence of the global financial crisis, the banks have been moving to source a larger proportion of their offshore borrowings in longer term borrowings rather than shorter term ones. So the banks are taking steps to improve the resilience of their offshore borrowings.

Senator BOSWELL —But is it a concern to you or do you think it is overstated?

Dr Gruen —I think the fact that Australia borrows a substantial amount in offshore markets through the banks is something that means that we need to remain vigilant about the quality of our financial regulation. I think that is absolutely true. Our financial regulation performed extremely well in the financial crisis, but there is no question that the fact that we borrow a lot in overseas markets means that it is extremely important for the Australian economy that we keep the confidence of those markets. That requires sensible domestic policies and good financial regulation. I do not think it is something that is alarming, but I do think it is something that requires that we continue to have sensible policies in this country, particularly in financial regulation.

Senator BOSWELL —The technical report of the ACTU says:

If it does not come to an end from household debt saturation, the Australian boom from 1993 to date could easily end in a crisis in financing the balance of payments deficit.

It sounds like the ACTU has got a bit in common with you, Senator Joyce. They are concerned too. The report goes on:

This would rebound on the household sector by raising prices, through the increased costs of imported consumer goods due to the devaluation and by raising interest rates as well. The resulting fall in household incomes would reduce demand and generate unemployment.

Is the ACTU correct in saying that Australia faces rising prices, rising interest rates, lower incomes and higher unemployment?

Dr Gruen —From a balance of payments crisis?

Senator BOSWELL —The question I asked was ‘through the increased costs of imported consumer goods due to the devaluation and by raisings of interest rates as well’.

Dr Gruen —As I understand the question, it is that the long run of substantial current account deficits is going to lead to a balance of payments crisis sometime in the next decade and that that would have very substantial deleterious effects on the Australian economy. I think I have answered this question, in the sense that there are very understandable reasons why Australia has a high level of investment. Our level of savings is not actually low by OECD standards. In fact, it is almost exactly the average of the OECD. In distinction from a lot of other countries that run large current account deficits, many countries in the OECD do so because they have low savings, and that would apply to the United States amongst others.

Senator BOSWELL —I am asking you—

Dr Gruen —I know you are, and I am saying that I think that the constellation of investment and savings in Australia, which is what is lying behind the large current account deficits, is a consequence of the strengths of the Australian economy—namely, that we are a resource rich country with resources that are in substantial demand from the rest of the world.

Senator BOSWELL —But are we going to face rising prices, rising interest rates, lower incomes and higher unemployment?

Dr Gruen —No.

Senator BOSWELL —No. Thank you.

CHAIR —Senator Boswell, I think it would be useful for the rest of the committee if you could table that document.

Senator BOSWELL —I cannot, because I do not have it. But I certainly will; I will go and get it. The ACTU—

Senator Sherry —Sorry, Senator, but it takes longer than necessary and it is a little difficult if we do not have the document with us.

Senator BOSWELL —I am sorry; I will get you the document. I have got two questions to ask and then you will not need the document—but I will go and get it for you. In the ACTU-ACF report, they model their preferred option of reducing carbon emissions by 50 per cent by 2030. They judge that the ratio of household debt to gross disposable income will stabilise at around 200 per cent. What would be the implications if we tried to reduce carbon emissions by 50 per cent? This is your mob, Doug.

Dr Gruen —As you know, Treasury did some modelling about what would be the economic implications of reducing carbon emissions over an extended period, and I think we have been through that on many occasions. I think the report on the economics of introducing emissions trading talked about what the economic implications would be of deep cuts in carbon emissions over an extended period of time. The answer to that was that, for most of the scenarios that were looked at, it meant that average growth was slower by 0.1 per cent per annum.

Senator BOSWELL —Per what—one per cent, two per cent?

Dr Gruen —Sorry? It reduced GNP per capita growth by 0.1 per cent per annum for the scenarios that were modelled by the Treasury.

Senator BOSWELL —But that was a five per cent reduction. What would 50 per cent do?

Dr Gruen —It rounds to the same number, if my memory is correct. But Mr Ewing will know this—

Mr R Ewing —I was not entirely certain what time period the 50 per cent was referring to?

Dr Gruen —Yes, it will depend.

Senator BOSWELL —I am quoting the ACTU and ACF report. Their preferred option for reducing carbon emissions was by 50 per cent—

Dr Gruen —By when?

Senator BOSWELL —by 2030.

Dr Gruen —Okay. Well, that is a deeper cut than would have been modelled in our modelling.

Mr R Ewing —I do not have the exact figures to hand. We probably have numbers in that broad area, as the Garnaut minus 25 scenario had a 25 per cent reduction from 2000 levels in 2020, which then went on to a 90 per cent reduction by 2050, and in that case the figure that Dr Gruen quoted is the case: it was a reduction in growth of 0.1 per cent per annum, I believe, in GNP.

Senator BOSWELL —Okay. So you think it will reduce GDP by 0.1 per cent?

Dr Gruen —The growth rate.

Mr R Ewing —Annual GNP growth by 0.1 per cent. The total impact on GNP would be different.

Dr Gruen —Of course, this depends on imposing a carbon price and therefore the reductions being on the minimum cost basis.

Senator BOSWELL —What would the carbon price go to, then, if the 50 per cent reduction by 2030 was implemented?

Dr Gruen —Sorry, Senator, we have not done that particular scenario, but you could certainly find out the carbon price for the Garnaut minus 25 scenario that Mr Ewing was talking about. That would have been in the report.

Senator BOSWELL —Mr Ewing, would you have any idea what that was, off the top of your head?

Mr R Ewing —In what year would you be interested in the carbon price?

Senator BOSWELL —2030.

Mr R Ewing —I do not have that figure to hand, I am afraid. I will have to take that on notice.

Senator BOSWELL —What figures have you got there?

Mr R Ewing —I have 2020 and 2050.

Senator BOSWELL —Give us both, then.

Mr Ewing —In the Garnaut 25 scenario we had an emissions price in real 2005 Australian dollars of $60 in 2020, which was increasing to $197 in 2050. If you did the maths you could work 2030 from that, I just do not have that figure in front of me.

Senator BOSWELL —I am sure you could do that for us, as you are more qualified than I am.

Dr Gruen —We will take it on notice.

Senator BOSWELL —They say that requires an assembly of large resources to decarbonise the economy such that by 2030 an extra $463 billion will have been invested. Can Australia stay afloat while investing nearly half a trillion dollars in decarbonising the ACTU way? What would the consequences be of investing $463 billion in decarbonising Australia?

Dr Gruen —I would need to see the detail to be able to give a coherent answer to that question. Even without decarbonising the Australian economy we are looking at very strong investment over the next several years as a consequence of our expectation and many people’s expectation that China’s and India’s growth will continue and they will continue to have high demand for the sorts of raw materials that Australia produces. As a consequence of that we are likely to see a combination of substantial mining investment and substantial demands on infrastructure. We are likely to see a run of years in which Australian investment is high by historical standards. It may well be that we are looking at an extended period of larger than usual current account deficits. That is certainly possible.

Senator BOSWELL —I do not think that is the question I asked. What I suppose I am asking, to put it more indirectly, is: what would be the impact of taking $463 billion out of the economy and investing it in decarbonising the economy, renewable energy and so forth?

Dr Gruen —It would not be taking it out of the economy ; it would be changing the structure of the economy to do some things that it does not currently do and do less of the things that it does currently do.

Senator BOSWELL —Can we afford to spend $463 billion, in the opinion of the Treasury generally?

Dr Gruen —As I said, I have not seen the report so I am not sure exactly where the number comes from.

Senator BOSWELL —It comes from the report of the ACTU and the ACF.

Dr Gruen —As we said, if you do this in the least-costly way possible, which involves a carbon price, then the cost of even quite deep cuts can be quite small provided you do it over an extended period of time.

Senator BOSWELL —We are in 2010 now so this is in 20 years time.

Mr Ewing —I want to make 100 per cent certain I am looking at the right thing. You are referring to the National Institute of Economic and Industry Research report that was sponsored by the ACTU and ACF, is that correct?

Senator BOSWELL —Yes.

Mr Ewing —I would hate a report that Treasury commissioned to be labelled as Treasury analysis in every instance. I am sure that the ACTU and ACF do not necessarily sign up to every single detail in this one so I just want to clarify that.

Senator BOSWELL —I am not suggesting that you had any involvement in this report. I am just asking your opinion of the report.

Dr Gruen —As I said, I have not had a chance to read it so I am not really in a position to comment.

Senator BOSWELL —Mr Ewing seems to have.

Mr Ewing —Yes, I have a copy in front of me.

Senator Sherry —Not a hard copy, it is the wonders of new modern technology that he is accessing.

Mr Ewing —But I should also clarify that, unfortunately, I was on leave when this report came out so I am looking at aspects of it for the first time now.

Senator BOSWELL —It seems a significant, a huge amount of money, $463 billion, to be spent by 2030 to decarbonise Australia.

Dr Gruen —I think we may well have said all that we can usefully say. We made the point that if you were to do this at the lowest possible cost, which involves a carbon price, the costs would be the ones that I reported earlier and you could engineer deep cuts in carbon emissions provided it is over an extended period of time and provided it is done using market mechanisms.

Senator BOSWELL —What would the impact on the economy be?

Dr Gruen —As I said, for the scenarios that we looked at, which ranged from a five per cent reduction, from 2000 levels, by 2020 to a 25 per cent reduction in CO2 emissions, from 2000 levels, by 2020, each of those scenarios had reduced GNP per capital growth by 0.1 per cent per annum. Obviously, there is rounding involved there but that is the order of magnitude of the cost.

Senator BOSWELL —For the uninitiated can you explain that to me. If you want to reduce your carbon footprint by five per cent it costs how much? Your modelling was five per cent.

Dr Gruen —We did four scenarios, if I am right—

Mr R Ewing —Yes.

Dr Gruen —of a range of cuts. We are always talking about them relative to 2000 levels. So these are not five per cent cuts compared to what would otherwise be the case; they are much bigger than that. A five per cent cut by 2020 relative to 2000 levels is a much more substantial cut from the level of C02 emissions than you would see if you did nothing. So these are substantial cuts.

Senator BOSWELL —I am taking it that this $463 billion figure would be taken from 2020.

Dr Gruen —Indeed. The scenarios that we looked at had those sorts of cuts by 2020 and then they had very much bigger cuts by 2020 so you are on a path to an economy with very much lower levels of CO2 emissions than are currently being emitted into the atmosphere. The estimates were as for each of those scenarios, and obviously they have different costs: the deeper the cuts the larger the costs. But they all round to about a reduction in growth of GNP per capita of 0.1 per cent per annum.

Senator BOSWELL —So if we were to cut our carbon emissions by 50 per cent by 2030 it would cut the growth by 0.01 per cent. Is that what you are saying?

Dr Gruen —It is 0.1. As Mr Ewing said, we did not do that particular scenario. But the scenario we did do, which was the Garnaut minus 25 scenario, has cuts which are not quite as deep as the ones you are talking about—we do not know exactly because we have not looked—but comparable.

Senator BOSWELL —So what was the outcome of that?

Dr Gruen —We did not report the results to two significant figures but to one figure it was a 0.1 per cent per annum cost to GNP per capita growth.

Senator BOSWELL —So if we go out and spend $463 million by the year 2030 we are going to cut our GNP growth by 0.1 per cent.

Dr Gruen —Per annum. Except that I know nothing about the $463 billion.

Senator BOSWELL —Well, that is the guts of the question. The ACTU want to put $463 billion into decarbonising Australia by 2030. Your answer to me, and you may correct it, is that if we do that we are going to affect the GNP by 0.1 per cent.

Dr Gruen —No. I said the modelling that we did—

Senator BOSWELL —Can you just tell me what will happen if we—

Dr Gruen —I cannot tell you because I do not know the details of this report.

Senator BOSWELL —Maybe Mr Ewing has got the report there.

Dr Gruen —Even if he has, the point is we are not going to give you off the top of our heads, from what some detailed alternative modelling suggests, what our estimate is of the economic cost of some alternative scenarios. We have done a series of scenarios which we have published and given extensive detail on. We can take on notice a question about what Treasury’s estimate is of the economic cost of someone else’s proposal but we cannot give you an answer here and now. Not even Mr Ewing can do that.

Senator BOSWELL —Well, if you would do that for me and if you would also put this on record now. You said you had modelled four scenarios. Can you tell us the four scenarios that you have modelled and the results?

Dr Gruen —This is all published.

Senator BOSWELL —I know, but I am asking you—

Mr R Ewing —I am happy to quickly recap the scenarios. We modelled two scenarios which were labelled the CPRS scenarios. The first, CPRS minus five, had a five per cent reduction of emissions against the 2000 benchmark by 2020 and a 60 per cent reduction by 2050. The CPRS 15 scenario had a 15 per cent reduction in 2020 and a 60 per cent reduction in 2050. Then there were two Garnaut scenarios. There was the Garnaut minus 10 scenario, which had a reduction of around 10 per cent by 2020, I think, going up to something around 70 per cent by 2050. But it was based on a per capita allocation, so it was a different approach. Finally the Garnaut minus 25 would have a reduction of 25 per cent in 2020 and a reduction of about 90 per cent by 2050.

Senator BOSWELL —Have you got the costs that are involved in that?

Dr Gruen —Yes. The cost for each of these scenarios rounded to one decimal point was 0.1 per cent per annum.

Senator BOSWELL —I do not know if this is the appropriate committee in which to ask this. How much overseas aid was given for climate aid? How much money was spent for overseas climate aid?

Mr Flanagan —Part of it is a definitional issue as to which parts would be ODA eligible. I would have to quickly go through and see which parts would be ODA eligible components, but that would probably be more a question for AusAID rather than for ourselves.

Senator BOSWELL —But you must know. You are the Treasury, so you must know.

Senator Sherry —Not necessarily. This is the macro area of Treasury.

Senator BOSWELL —Well, this is a macro question.

Senator Sherry —Whilst they have got massive and significant expertise, it is just a touch unfair to expect them to be able to lay their hands on other areas of estimates in detail quickly.

Senator BOSWELL —Okay. Maybe I could put it on notice.

Senator Sherry —Yes, we will take it on notice.

Senator BOSWELL —I have got a couple more questions. At the last estimates Mr Ewing told us that the Copenhagen outcome was broadly consistent with the assumptions used in Treasury modelling of the CPRS. I asked Mr Ewing why Treasury had not modelled the scenario of Australia going alone when the rest of the world did not have an ETS. Mr Ewing replied it was ‘because it does not seem to me a very relevant scenario to be modelling. We are not in a world where Australia is going to be alone. It does not seem that it is very relevant to model that.’ In answer to my question on notice, Treasury replied just last week:

The proposals eventuating from the United Nations Framework Convention on Climate Change conference in Copenhagen last year are broadly consistent with the … multi-stage approach …

Has Treasury revised its earlier position and undertaken additional modelling of the CPRS perhaps involving different assumptions about international action post Copenhagen?

Mr R Ewing —We have not done any additional modelling as to what different international scenarios would look like at this stage.

Senator BOSWELL —On 27 April the Prime Minister cited slow progress in the realisation of global action on climate change as a reason for delaying the CPRS. He said international action had been slower than was originally anticipated and what ‘we need is to make a judgment of what happens post 2012 and of what the rest of the world is doing’ because the rest of the world and what they do was pretty important in terms of the Australian future. Isn’t the Prime Minister’s statement at odds with what you told us in February, that the international response was broadly consistent with Treasury modelling?

Mr R Ewing —I do not believe so because I do not believe the Prime Minister was referring to Treasury modelling assumptions in his statement.

Senator BOSWELL —He was not. You were saying the rest of the world was doing what Copenhagen did; it was consistent. He was saying it was not consistent.

Dr Gruen —We are not really in a position to make reflections on this other than to refer to the modelling we already did.

Senator BOSWELL —The government website says:

The Prime Minister announced that the Government will not introduce the CPRS until after the end of the current commitment period of the Kyoto Protocol (which ends in 2012) and only when there is greater clarity on the actions of other major economies including the US, China and India.

I was raising concerns that the Treasury has not modelled any action by other countries like China and India on ETS. You said that was not relevant, and the modelling will still work post Copenhagen. Yet now the Prime Minister says that we have to wait for global action before we can continue with the CPRS.

Were the Treasury outcomes wrong? You are inconsistent with what the Prime Minister was saying.

Senator Sherry —No, they are both right: Treasury is right and the Prime Minister is right. It is as simple as that.

Senator BOSWELL —So the world is going to go ahead and do what Copenhagen wants it to do, and the Prime Minister says it is not—everyone has got to advance—so you are both right. They are two things going totally 180 degrees the other way.

Senator Sherry —I think, firstly, as Treasury indicated, that you cannot go to them about announcements by the Prime Minister. Secondly, it is not the only reason, as you well know, that the Prime Minister gave. The Prime Minister also publicly referred to the failure of the Senate to pass it—I could go into that in some detail; I will not—but that was also another reason given. If we cannot get the thing through the parliament it is just a bit tough.

Senator BOSWELL —That should not make any difference if you—

CHAIR —I think that Senator Eggleston has the call.

Senator EGGLESTON —I would like to ask a couple of questions with respect to the value of the Australian dollar. Our currency has depreciated significantly since the budget was handed down. Would a lower value of the Australian dollar be expected to change inflation forecasts?

Mr Gruen —It would depend on whether it were sustained. If it were sustained, it would have implications for outcomes, not only for inflation but for other things. But, of course, the Australian dollar is not the only thing that has changed; other things have changed as well, which is always the case. It is always the case that conditions evolve and circumstances change. I am afraid that is the situation that we find ourselves in often.

Senator EGGLESTON —Your inflation forecasts now incorporate assumptions about the future path of monetary policy in response to expected inflation, so what is your view of where interest rates will go? Do you think that they will be higher than anticipated by the Reserve Bank?

Mr Gruen —I do not speculate on future interest rate movements. It is certainly the case that the markets have changed their view of the future path of interest rates. At the time that the budget forecasts were being put together, the markets’ expectations were that there were going to be further rises priced into the forward curve out to the end of 2009, and it is now the case, based on the latest information that I have seen, that the markets are not expecting any change in interest rates out to the end of 2009. The market has changed its view on the likely future path of interest rates.

Senator EGGLESTON —It is very interesting; so you are expecting—

Mr Gruen —Sorry—I said 2009; I should have said 2010. I apologise.

Senator EGGLESTON —I assumed you meant that.

Mr Gruen —It is important for me to keep in mind which year we are in.

Senator EGGLESTON —It is always a very good thing to do! You are suggesting, in fact, that interest rates will not change over the next few months?

Mr Gruen —I am not suggesting that; the market is. I am not making any comment.

Senator EGGLESTON —All right; that is a market assumption.

Mr Gruen —That is what the market is pricing in at the moment.

Senator EGGLESTON —I presume that is, in effect, an assumption by the market?

Mr Gruen —It is the outcome of people trading; different people have different views, but the weighted average of the money that is being put into the market is of that view.

Senator EGGLESTON —I think we are talking about the same thing.

Dr Gruen —I think we are.

Senator EGGLESTON —That is very interesting nevertheless. The Australian dollar has depreciated by over 10 per cent in the last few weeks, although other currencies of resource-rich countries have also fallen. The Australian dollar has in fact fallen by about double the rate of these other currencies with respect to the United States dollar. In your view, what are factors impacting on the fall of the Australian dollar in this way?

Dr Gruen —I think I might have answered this question while you were out of the room, Senator.

Senator EGGLESTON —My apologies.

Dr Gruen —That is all right. It is the case that since the end of April the Australian dollar has fallen by more than some other commodity exporting currencies, but I made the point in my earlier remarks that this was also a feature of what happened in late 2008 when the Australian dollar fell—certainly more than the Canadian dollar. When there is a rise in risk aversion in the world, which there currently is, one of the effects of that is that commodity prices come down and the other is that the Australian dollar tends to fall by more than other commodity currencies. It is particularly highly traded, and so people unwind long positions in the Australian dollar and that leads to larger fall.

What we have seen over the last month is broadly in line with what we saw in late 2008 in response to a rise in risk aversion in the world, although the scale of what we have seen over the last month is significantly less than the scale of what was seen in late 2008.

Senator EGGLESTON —That is very interesting, especially considering that other countries like South Africa and Canada are both resource-rich countries.

Dr Gruen —But as I said, if you look in 2008, you will find that at the time the Australian dollar fell a long way, as you would remember, and the Canadian dollar fell by significantly less than ours did at that time.

Senator EGGLESTON —Yesterday KPMG released a report entitled Potential financial impacts of the Resource Super Profits Tax on new mining projects in Australia. I just wonder if I could ask you some questions about this. This report shows large falls in the net present value of most mining projects in Australia and they, for example, say that there has been a 46 per cent fall in the net present value on financial models for iron ore projects; a 57 per cent fall in net present value on model black coal projects; a 15 per cent fall in bauxite projects; and negative net present values for nickel, copper and goldmines such that they may become economically unviable. If a company suffers a reduction in its net present value of its existing and future projects, what will happen to the share prices of those companies, do you think?

Dr Gruen —I am really not in a position to comment in any detail about a report that I have not seen, but obviously if a net present value of a company fell you would imagine that its share price would fall.

Senator EGGLESTON —Yes, that is a fair conclusion; I would think that as well. The report further concludes that the mining sector would not be able to source 40 per cent of its funding at the long-term bond rate. I ask: what would be the implications for mining investment if under the RSPT the mining sector cannot access finance at the long-term bond rate?

Dr Gruen —Since that exact issue amongst others goes to the implantation of the RSPT, I do not think it is helpful for me to speculate about that because it and the other design features of this proposed tax are the subject of the consultations that are currently going on between the Treasury and mining companies. I am certainly not the person to comment on this. The people you need to talk to about this are the people who are doing those consultations.

Senator EGGLESTON —Very well. Did Treasury conduct any analysis on the effect of the present values of different types of mining projects following the application of the RSPT?

Dr Gruen —Again, you really need to talk to the people who have been involved in this work rather than me.

Senator EGGLESTON —So we are not sure if the analysis was done, but we are assuming it may have been. Is that a fair comment?

Dr Gruen —I cannot comment either way. It certainly was not done by the macroeconomic group.

Senator EGGLESTON —I see. I will conclude there if you cannot answer further questions.

Senator BUSHBY —I have a few questions about the structural budget balance. In last year’s budget you produced estimates of the structural budget balance, estimated at below negative four per cent, using certain assumptions about unemployment and terms of trade. I am referring in particular to the 2009-10 Budget Paper No. 1 at page 4-17. How would a decrease in the expected unemployment rate affect the structural budget balance if the underlying cash balance remained unchanged?

Dr Gruen —It would depend on whether you regarded the change in the unemployment rate as a structural change or a cyclical change. It would depend on that. If it were a cyclical change, you would get a different answer than if you thought that the decline in the unemployment rate was structural.

Senator BUSHBY —If it were structural, would it increase or decrease the structural budget balance?

Dr Gruen —Hang on, this is getting tricky. So the underlying cash balance has not changed and you want to know what would happen to the structural balance if you thought the structural rate of unemployment was lower; is that the question?

Senator BUSHBY —Yes.

Dr Gruen —I will do my best. The structural budget balance would be improved if the structural rate of unemployment fell, but if the actual underlying cash balance had not moved that would be a structural deterioration, assuming that the structural rate of unemployment was now lower. I think that is right.

Senator BUSHBY —I think that is what I needed.

Dr Gruen —I should add that we do not think there has been a structural decline in the unemployment rate.

Senator BUSHBY —You said it might well be different if there had been a cyclical decrease in the unemployment rate.

Mr T McDonald —Because the structural budget balance is based on a series of structural assumptions. If you take the position that the structural rate of unemployment is unchanged then if the actual unemployment rate is lower then any movements in the budget balance as a result of that would be assumed to be cyclical. So a reduction in the unemployment rate would be expected to result in an improvement in the underlying cash balance both through higher revenues and lower outlays. Then if the observed result was that the actual budget balance did not change despite the cyclical improvement in the unemployment rate then you would assume that the structural budget balance would have deteriorated.

Senator BUSHBY —That is what I expected. How would an increase in the expected terms of trade affect the structural budget balance if the underlying cash balance remained unchanged—would it increase or decrease the structural budget balance?

Mr T McDonald —This is perhaps even a trickier question than the one on the unemployment rate. What is quite difficult with things like the terms of trade is knowing exactly whether an improvement is because of cyclical factors or structural. Indeed, there are going to be cases where you get a little bit of both. If you were to assume that all of an increase in the terms of trade was cyclical in those circumstances then you would expect that increase in the terms of trade to result in a higher level of revenue and, therefore, an improvement in the underlying cash balance. If the result was in fact no improvement in the underlying cash balance that would imply a deterioration in the structural budget balance.

Senator BUSHBY —Has Treasury done any further work to estimate the structural budget balance as it currently stands? It was in the papers last year but I do not know if it is this year.

Mr T McDonald —We have done some work since last year’s budget to refine, extend and monitor structural budget balance measures. We have not done the calculation based on this year’s budget numbers.

Senator BUSHBY —Why is that?

Mr T McDonald —As you will recall, in last year’s budget papers the analysis of the structural budget balance did not occur in isolation but rather occurred as part of a broader assessment of fiscal sustainability. In the discussion you had with Dr Gruen earlier about the chart that is in this year’s budget I think Dr Gruen noted that that was one piece of evidence. I think we see a structural budget balance measure as being one part of evidence in a broader assessment of fiscal sustainability.

One thing we tried to do in last year’s budget papers was highlight just how dependent these measures are on the assumptions that are made, in particular, as you referred, to the terms of trade. In the budget papers last year we said:

Alternative assumptions around the equilibrium terms of trade—that is, assumptions around the extent to which movements are structural rather than cyclical—can result in significantly different structural budget balance estimates.

Despite that, one of the things I keep learning with the experience is that, no matter what you put in words, people pay far more attention to figures. Historically we have resisted publishing structural budget estimates for the very reason that there is excessive focus on point estimates rather than taking—

Senator BUSHBY —You published it last year. As you note, people focus more on figures than they do on the words. It was to some extent used for political purposes last year. This year it is not published. I am curious why—not that I am suggesting that Treasury would be complicit in any political activities. Is there the potential for this year to show that it has got worse and it is not there because of the potential to be used for political purposes again?

Dr Gruen —I will not comment on that, but I will make the point that the IMF and the OECD publish structural budget balances. Certainly the OECD have been making the point for a while that for a country like Australia the level of the terms of trade—the standard way of doing structural budget balances is not to talk about issues to do with terms of trade but to cyclically adjust—

Senator BUSHBY —Australia is a little different in that respect.

Dr Gruen —Exactly. So the OECD had issued a working paper sometime ago making the point that for commodity exporting countries like Australia it becomes extremely important what assumptions you make about the structural level of the terms of trade because that has very substantial implications for your revenue estimates, as everyone around this table would be aware. We had been doing some of this work ourselves, but we thought there was heightened interest in this issue, partly because the OECD drew attention to it and partly because the terms of trade had moved so much. There was a long period of time when small movements in the terms of trade were regarded as the norm, but obviously in the past six years or so the terms of trade have changed by an amount that we have not seen since the Korean War.

The issue of the implications of a very different structural assumption for the terms of trade were front and centre. We did some work in the budget last year and we published that work. But, as Mr McDonald says—and perhaps we should have been clearer—these assumptions are extremely sensitive to the detailed assumptions you make for the structural level of the terms of trade, and we would still make that claim.

Senator BUSHBY —In estimating last year’s structural deficit, what value did you use for the terms of trade? What did you assume was the natural level?

Mr T McDonald —The value for the terms of trade was the same as the end point of the medium-term fiscal projections. The easiest way to look at this is to refer to the Intergenerational report, because it is equivalent to where the terms of trade finishes in the Intergenerational report projections.

Senator BUSHBY —Does it have a figure?

Mr T McDonald —It does have a figure. One of the slight complications is that the terms of trade figures from year to year are comparable but need to be adjusted because the ABS rebases the national accounts to a different year because it is an indexed number.

Senator BUSHBY —You would have had to assume a figure as the normal terms of trade to do a structural deficit calculation.

Dr Gruen —We could take it on notice and give you an answer.

Senator BUSHBY —I do not know whether you can tell me this: is the terms of trade now higher or lower than last year’s assumption?

Mr T McDonald —It is higher.

Senator BUSHBY —If you take that other question on notice it would be very good.

Dr Gruen —The question you would like the answer to is what the level was assumed to be here and what it is now in the comparable period.

Senator BUSHBY —And also what you would consider the normal level is now, yes. You are saying it would be adjusted. With structural deficit calculations you assume capacity and normally that is your growth and your unemployment rate, but in Australia, because it is a commodity country, we also do terms of trade. I want to know what the assumption is for the purpose of last year and whether that has changed.

Dr Gruen —Yes, indeed.

Mr T McDonald —I guess on the first part of that, what we said in last year’s budget was that the terms of trade assumption that we used was consistent with the end point of the medium-term projections outlined in appendix B of statement 3, and that says that the phase-down assumes the terms of trade decline by around 15 per cent from the end of the medium-term projection periods by 2022-23. That end point, when we reach it, is later now. But that end point is consistent with the equivalent end point in the Intergenerational report for the terms of trade. I believe there is a chart that has that. We can take it on notice to see what extra we can provide.

Senator BUSHBY —I have a couple of final questions on this. You mention you had done some work on the structural budget deficit this year. Would the structural budget balance be above or below the actual underlying cash balance for 2009-10 and 2010-11—that is, is the structural element of the budget expansionary or contractionary?

Dr Gruen —We may need to take that on notice because it will depend on the assumption you make, particularly for the terms of trade. Obviously the unemployment rate is much closer to our assumed full employment rate than we had thought it would be. We would have to take it on notice.

Senator BUSHBY —Are you aware of whether any other organisations produce structural deficit estimates for Australia?

Dr Gruen —I think the OECD does.

Mr T McDonald —The OECD and IMF do and Access Economics also does. Just one thing on the Access Economics estimates, I think they are in the Budget monitor. One of the things that the most recent Budget monitor has done is make a significant adjustment to the assumption that they make for the underlying or structural terms of trade estimate—quite substantially, as far as I can understand. That has an impact on their estimates as well.

Senator BUSHBY —Bearing in mind that impact, what do those other organisations say has happened to Australia’s structural deficit over the last year?

Mr McDonald —Again there are questions of timing on this. I do not have the latest OECD ones because they have only just come out last week. The IMF estimate—

Senator BUSHBY —Can you take it on notice to provide the latest ones that came out last week?

Mr McDonald —Yes. The most recent ones from the IMF, which predate the budget and so are not necessarily directly comparable, are moving from in 2008 -0.6, 2009 -0.4, 2010 -4.9 and 2011 -3.5. That is covering all levels of government, state and federal and acts as a percentage of potential GDP, I think. Access Economics estimates—these are in financial years, starting in 2008-09—are -2.3, 2009-10 -3, 2010-11 -2.3, 2011-12 -0.8 and 2012-13 -0.6. I guess the point to note there, though, is that a key element, as you are saying before, of a structural balance budget estimate is what your estimate of the underlying cash balance is. Access Economics, and again this budget monitor predated the budget, including the savings features in the budget, had an actual underlying cash balance of -0.5.

Mr Gruen —In 2012-13.

Mr McDonald —In 2012-13, which is only slightly different to the structural budget.

Senator BUSHBY —I will have a look at those figures and think about those later. I am not sufficiently au fait with it all to actually analyse all that and get into it. So we will move on to something else.

CHAIR —Senator Cameron has a few questions.

Senator CAMERON —Mr Ewing, I think I have asked you previously about a Minerals Council report entitled The Employment Effects on the Australian Minerals Industry from the Proposed Carbon Pollution Reduction Scheme in Australia. That was a Minerals Council Concept Economics report of 21 May 2009. You are aware of that report?

Mr Ewing —I am aware of that report.

Senator CAMERON —I note that the Minerals Council has this morning produced a KPMG report. You are aware of that?

Mr Ewing —I have heard reference to it, but as I have been here since 9 am I have not seen anything on it.

Senator CAMERON —So now we have got two Minerals Council reports out in the public arena. I want to take you back to the original report, the May 2009 report. Are you aware that that Concept Economics report said that there would be 23,510 less jobs in regional Australia than otherwise would be the case as a result of the government’s proposed CPRS?

Mr Ewing —That sounds like the estimate from the report and I do not have it in front of me.

Senator CAMERON —Are you aware that the Minerals Council then put out a press release claiming that there would be 22,510 less jobs, yet what they neglected to say was ‘than would otherwise be the case’, that in fact on the Minerals Council’s own website a National Institute of Labour Studies report had said that over the period there would be a growth of 86,000 job. So really, instead of the position being that 23,510 jobs would be lost, there would be a net growth of 62,490 jobs in the mining industry?

Mr Ewing —That sounds correct, although I should caution that you should be careful when adding together employment numbers from two disparate studies because that can lead to misleading results. But I believe that that is a relatively accurate summary, from my knowledge of those reports.

Senator CAMERON —I am worried about the Minerals Council coming out with these reports and then misrepresenting them. This Concept Economics report has some flaws, from your analysis, like unspecified reference scenarios, ignoring dynamic responses and changing prices and circumstances in regions. Is that correct?

Mr Ewing —Yes, that is correct.

Senator CAMERON —Can you outline some of the flaws in that report?

Mr Ewing —I believe we provided an answer to that on notice previously. There are several issues to be noted in that report. In particular there is an ‘off-model adjustment to the mining and smelting industries’—no details are provided on that adjustment or how they are important for the results. There is no aggregate whole economy impact reported, which makes it very hard to compare this work or get a sense of how its overall macroeconomic impacts fit into the general picture of the very substantial range of reports that have been released. In the absence of that context, it can be quite difficult to judge some of the detailed results of the report. The analysis is reported entirely in terms of output and employment changes relative to an unspecified reference scenario. That means that, while it mentions ‘23,500 fewer jobs than would otherwise be the case’, no information is provided as to what ‘would otherwise be the case’. That makes it very hard to judge the materiality of these impacts. It also makes it difficult to judge the economic circumstances which the consultants have used in their overall report. I believe those are the major issues.

Senator CAMERON —So, back in May, if the Minerals Council was prepared to go out and argue that 23,500 jobs would be lost, that is a misrepresentation of even the Concept Economics report?

Mr Ewing —I would certainly say that the description ‘23,500 jobs lost’ was an inaccurate description of the concept modelling.

Senator CAMERON —The Concept Economics report was inconsistent with the modelling that was done for the CPRS by Treasury and others?

Mr Ewing —It is a bit hard to judge exactly how inconsistent it was, because there were not full details on important questions such as the reference scenario and the overall economic impact. I really cannot answer for certain how consistent or otherwise it was. They simply did not provide enough information.

Senator CAMERON —I suppose, given the misrepresentation that the Minerals Council and its chief executive, Mitch Hooke, put forward in relation to that first report, we will need to be very careful of misrepresentations from the Minerals Council and the KPMG report. Sorry, I will retract that.

CHAIR —Senator Bushby now has some questions.

Senator BUSHBY —I refer to comments made by Dr Henry at the additional estimates hearings in February on the passing of the financial crisis:

What people have called the global financial crisis, that has passed, I think it is safe to say, but that is not to say that there will not be further adverse shocks for financial markets down the track. … I do not imagine shocks of the sort that would be globally significant, …

Do you stand by Dr Henry’s comments in that regard? Is that still the situation, given the events that have transpired?

Dr Gruen —There have been further shocks, as Dr Henry alluded to. Whether they will be of global significance is yet to be seen. There is certainly substantial significance to Europe. The shocks that are coming from the periphery of countries in Europe which are the most affected are serious developments which I think have profound implications for Europe. It does remain to be seen how big the implications are for the rest of the world. I say that because, although we have seen signs of tensions, if you like, in financial markets, at least thus far, those things have been much more contained. They are nothing like the order of magnitude of the post Lehman Brothers period or even of the period before then. In other words, the spreads have gone up but they are still quite low by the standards even of the period from the middle of 2007 to September 2008.

12:49:50

Senator BUSHBY —The context is set very well for my next question: what are your views on the comments made by the governor of the Bank of England on 12 May 2010? He said:

… the financial crisis is far from over. As debt has moved from the financial to the public sector, the banking crisis has turned into a potential sovereign debt crisis.

And, further:

America, and many other large economies including the UK, share some of the same problems as Greece with its public finances …

It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.

Those are quite alarming statements, particularly coming from the governor of the Bank of England.

Dr Gruen —Yes.

Senator BUSHBY —You mentioned the potentially serious consequences for Europe and certainly I would understand that Australia’s debt is nowhere near as severe and as concerning as the countries that were mentioned by the Bank of England governor. Nonetheless, the banking crisis—the subprime mortgage crisis—was not a crisis in Australia but had the potential to affect Australia.

Dr Gruen —Yes.

Senator BUSHBY —Similarly, if there is a sovereign debt crisis that does impact with the severity that the Bank of England governor is concerned about, that has the potential to impact in a big way in Australia.

Dr Gruen —I make a couple of points. Thus far it is the case that the countries that have been very severely affected have two characteristics. One is that they have either high or very high levels of government debt and they have large budget deficits. That is the first characteristic. The second characteristic is that they are in the euro area so they do not have control over their own monetary policy or their own exchange rates, and they have become very uncompetitive. All the countries that we are talking about—Greece, Portugal, Spain, Ireland and in principle you could perhaps add some more, but let us start with them—are all part of the euro area and they all have their price levels well out of line with the core countries of the euro area. Why is that important? It is extremely important because it means that fiscal consolidation in those countries cannot be offset by a depreciation of a currency or an easing of monetary policy, because they simply do not have those instruments. Why is that important? Because fiscal consolidation in those countries will substantially hurt growth in those countries and the fact that growth is hurt means that the fiscal problem looks even more diabolical, because you are not growing or in fact you may even be contracting, so your GDP is not growing and you are trying to get this debt under control.

Senator BUSHBY —I understand the difficulty—

Dr Gruen —Let me go on. Thus far, a consequence of these developments in the periphery of the euro area has been that bond yields in a lot of other countries, including countries with quite high levels of government debt—namely, the UK, Japan, Germany; these countries have different levels of government debt—

Senator BUSHBY —Yes, but they have substantial levels.

Dr Gruen —I do not want to make the claim that they are all high. They are substantial; they are not all high. The bond yields in Germany, the UK, Japan, the US, and for that matter here, have fallen. So thus far the situation has been that there is no sign of contagion from those problems to countries which have control over their own currencies and monetary policy and are in the process of either engaging in fiscal consolidation themselves or they are projecting it in their futures. That is an important distinction, because I think the governor of the Bank of England is making the point—obviously his words go all around the world, but they have particular resonance for his own country—which is an extremely point to make, that you need to retain the confidence of financial markets and therefore you need to have a credible policy for fiscal consolidation.

I can absolutely understand why he makes that point. It is a point that I would make as well. So I guess my point is that the events in the periphery of Europe are very troubling for the euro area. Those countries are in very difficult circumstances but the rest of world is not suffering from contagion from that, at least not in bond yields. But it is definitely the case that fiscal consolidation will be necessary in all of the countries that have very significant budget deficits. That is something that needs to happen over the next several years.

Senator BUSHBY —And that includes the UK and others—particularly in the UK, given that is where he was talking about. I think some of those comments may well have been made in support of announcements by the new government in the UK to actually fiscally consolidate.

Dr Gruen —That is right. The balancing act that those countries have is particularly difficult because in the ones where growth is still fragile they suffer from the fact that if you do fiscal consolidation too rapidly you can turn the economy back into a recession—which is what happened in 1937 in the United States.

Senator BUSHBY —It is certainly a potential. But I think he is saying that the alternative may be worse.

Dr Gruen —Absolutely. You are in a difficult circumstance and there are serious trade offs about what you do.

Senator BUSHBY —We will move on from there. I have asked questions about this before, particularly to Dr Henry. Essentially, budget forecasts are only as good as the underlying economic assumptions and the recent performance in forecasting key economic parameters has not been good. For example, last year’s budget forecasted that the Australian economy would contract by 0.5 per cent in 2009-10; this year’s budget tells us the economy will grow by two per cent.

Dr Gruen —Yes.

Senator BUSHBY —Last year’s budget said the unemployment rate would peak at 8.5 per cent in 2010-11; this year’s budget tells us the unemployment rate has already peaked at less than six per cent and is headed to a low of 4.75 per cent in 2011-12. These very significant changes to the underlying forecasts over the space of just one year illustrate that there is a large degree of imprecision in the budget numbers. Is that a fair comment?

Dr Gruen —This last year was a particularly difficult one. There is no question that there is a margin of error around forecasts.

Senator BUSHBY —Did you know at the beginning of the year that it would be a particularly difficult one?

Dr Gruen —Yes.

Senator BUSHBY —How confidently can you actually state then, if you know it is going to be a difficult one, what the figures will be in the coming year?

Dr Gruen —We were in the midst of the worst synchronised global downturn since the Great Depression and having a sense of how that was going to turn out was a tricky thing to do. We, along with a lot of other people, underestimated how quickly the Australian economy would bounce back. There is no question of that. Our forecasts were actually quite close to consensus forecasts at the time but as events have turned out, the outcome has been stronger than any of the forecasters who contribute to the consensus forecasts—there are 17 of them—expected. The outcome has turned out to be significantly stronger than anyone expected.

Senator BUSHBY —Do you think that the coming year or the coming years will be difficult as well?

Dr Gruen —I am hoping that conditions are going to be more normal and therefore that forecasting will be less fraught than it was last year.

Senator BUSHBY —On the basis of what you know, though? You say you ‘hope’. That is not—

Dr Gruen —I agree. I should take it further than ‘hope’.

Senator BUSHBY —On the basis of what you do know about the current economic state of affairs worldwide, do you think that it will be a normal year or is it likely to be?

Dr Gruen —Not completely normal, for the reasons that we have just been discussing. But it is certainly the case that conditions in financial markets are much closer to normal than they were in April or May of last year.

Senator BUSHBY —So better than last year, but not fully normal?

Dr Gruen —Not completely normalised.

Senator BUSHBY —And that may well have an impact on the actual figures as they turn out?

Dr Gruen —It is possible, yes.

Senator BUSHBY —You mentioned that the outcomes were far better than anybody predicted, including your own figures. As it turned out and with the benefit of hindsight, do you consider that the size of the fiscal stimulus was required? Was that quantum actually necessary, given where it ended up?

Dr Gruen —I think the conclusion that I have actually said before is that I think the fiscal stimulus and, for that matter, the monetary stimulus was more effective than we thought it would be. There were other things that also helped.

Senator BUSHBY —Obviously, looking back you can analyse it—

Dr Gruen —Yes.

Senator BUSHBY —but there are two ways of looking at it: (1) it was more effective; or (2) it was larger than it needed to be. Is there any evidence that you can point to that would help us decide which one of those paths you would actually take on an informed basis?

Dr Gruen —Yes, but judgment about whether something is bigger than it needed to be is a judgment about whether you would be comfortable with a profile for unemployment that was higher than the one we have turned out. So it is a cost benefit analysis that involves a trade-off between allowing the unemployment rate to be higher for longer and expending less money.

Senator BUSHBY —It is in a general sense but—I am running out of time to do this.

CHAIR —I am afraid you are. We could continue on for a long time but I think we have stretched the patience of the macro officials and tested their knowledge long enough. Thank you for staying longer than was initially required.

Proceedings suspended from 1.00 pm to 2.01 pm

CHAIR —Welcome to the Treasury Fiscal Group. Mr Ray, do you wish to make an opening statement?

Mr Ray —No, thank you.

CHAIR —We will start with questions straightaway. Senator Bernardi.

Senator BERNARDI —Mr Ray, I want to specifically address the role of the Minister for Population and population policy. So if you can point me in the right direction.

Mr Ray —Mr Murray is looking after that area.

Mr R Murray —The new population minister was appointed by the Prime Minister. He has a specific task over the next 12 months to develop a population strategy. The aim of this strategy is to look at various scenarios around population growth, taking into account various drivers of that, a lot of those being around economic and social issues, and then to look at the opportunities and challenges coming out of that. As the Prime Minister set out in his press release, some of those challenges are around economic development and a subset of that are around growth and development of Australian regions, towns and communities. Also, the aim of this strategy is to take into account not only the challenges but also the opportunities that exist around cities—planning, the urban amenity, transport infrastructure and those sorts of issues. Finally, to take into account clearly all of the environmental constraints around population and, in particular, issues such as water and also other issues related to climate change and the like. It is to look at a holistic approach. The minister is being supported by a task force in Treasury and we are approaching this task with a very right-across-government approach, a very collaborative approach. We are trying to ensure that we take into account every aspect of this subject in coming up with an overall population strategy.

Senator BERNARDI —When was Treasury advised that a Minister for Population would be commissioned?

Mr R Murray —The Prime Minister’s announcement was on 3 April, and I think that was a Sunday.

Mr Ray —Yes, a Sunday.

Mr R Murray —There were some discussions around that prior to that date?

Senator BERNARDI —How far prior—the day before, a week before, a month before?

Mr R Murray —I am not too sure on that. There were various discussions amongst ministers but certainly, in the weeks leading up to that, there were various discussions. We certainly supplied some input, but there was input from various other sources.

Senator BERNARDI —And so you are unable to give me a specific date when Treasury were advised that a Minister for Population was going to be appointed?

Mr R Murray —We probably became aware of it literally a day or so before that.

Senator Sherry —We will take that on notice and get you the exact date. As to the conversations, briefings, advices to ministers and discussions prior to that, obviously that will not be provided.

Senator BERNARDI —Were you consulted in regard to the placement or the additional responsibilities for Treasury to handle the population policy portfolio prior to the announcement?

Mr R Murray —There were certainly some discussions between ministers and certainly with the Treasurer but, if we are given a task, we are given a task.

Senator BERNARDI —But the department was not consulted prior to the appointment being made?

Mr R Murray —No, I am not saying that. Certainly, discussions were held. We were certainly privy to at least some of those discussions. Ultimately, this is a matter for the Prime Minister to decide in terms of arrangements regarding government administration. So the final decision of course was with him and his cabinet colleagues.

Senator BERNARDI —When the announcement was made, were any additional resources allocated in the form of staffing to Treasury to undertake this task?

Mr R Murray —Our view on all of this was that, for the first few months of this, we could handle this within our own resources. We had already invested, as you know, over maybe seven or eight years significant resources in this whole area and those resources have been the backing for the intergenerational reporting process. So we have a certain amount of resources both within our budget policy area, a fiscal group, but also backed up in the revenue group, in the micromodelling area. So we already had a significant amount of resources that we knew we could immediately back this up with, but then in the budget we were allocated another $1.25 million to cover the task force for the rest of its period, so through the fiscal year 2010-11.

Senator BERNARDI —How many additional staff for your task force will that $1.3 million cover?

Mr R Murray —Out of our own resources, during 2010-11, we are budgeting out of our own base resources about $800,000, which will account for about four or five staff. Depending on how you cut up the $1.25 million, we have budgeted—and this is what is in the costing—for an extra six staff. So we are looking at a task force of about 10 or 11 people. We have some resources in there for administrative costs as well.

Senator BERNARDI —Given that your existing resources, though, were used to produce, among other things, the Intergenerational report, I would make the presumption—and please correct me if I am wrong—that they were adequately utilised in the previous six or seven years and they were not just sitting around twiddling their thumbs?

Mr R Murray —We use all our resources pretty flexibly. I do not think there is anyone down at Treasury twiddling their thumbs.

Senator BERNARDI —No, and that is the presumption I make.

Mr R Murray —I beg your pardon?

Senator BERNARDI —That is the presumption that I make. So what area of Treasury will then be neglected, because these people are going to be tasked in a new task force?

Mr R Murray —It is a matter of priority and a matter of how much effort you put into various areas. In terms of the modelling side of this, a lot of this modelling goes on anyhow and it is not just related to issues like the IGR or population. A lot of modelling goes on around distributional issues, retirement incomes et cetera. So that area works on various tasks, including population. That is the first point.

We can also use the four resources that we ourselves put into the task force quite flexibly, back into the budget process. So we have ensured that within the fiscal group, which Mr Ray heads, that, if needs be, we can use these resources pretty flexibly. But, for the next 12 months, their main task will be the population strategy.

Senator BERNARDI —In the last two months, can you inform me what the task force has been doing?

Mr R Murray —We have been going through a significant data process, and a significant process of pulling together a whole lot of policy information. Bear in mind that we have been significantly preoccupied with the budget and budget processes at the same time. What have we been doing? We have been looking at a whole lot of areas where we do not have primary carriage. We have been trying to bolster our knowledge base on immigration for instance and we have started looking, in particular, at regional aspects of a lot of the issues that are coming up.

In the Treasury we also now have responsibility over housing supply and the COAG processes that are trying to improve housing supply. So again we have been trying to bolster our knowledge base in that area—for COAG and also to help with the population strategy. Related to that, we have been trying to bolster our recourses around cities and infrastructure. So we have been doing a lot of this pre-work. We are putting together the building blocks of this whole exercise. In addition to that we have been briefing the minister. So as we get up to speed; he is getting up to speed as well.

Senator BERNARDI —Could you tell me what policy levers are available to government in regard to population policy, according to your research.

Mr R Murray —It all depends how you define population policy. There are various levers over population itself, and there are various levers about how you might deal with an ageing population or a growing population or whatever. In terms of population itself, obviously there is little that you can do around fertility rates and mortality rates—which are the main drivers of the natural increase in population. There have been significant movements in both those areas but a lot of that is beyond the control of governments. So the main lever for a country like Australia is around migration levels.

Senator BERNARDI —It does not surprise me. I think that is a commonsense approach except the minister said that growth is not only—or principally—driven by immigration figures. He wants to find how creative he can be in terms of the policy levers that we have available to us. I will give you the full quote. He said:

… the growth there isn’t only driven by immigration figures, it’s also driven by an increasing birth rate and it’s also significantly driven by people moving there from other parts of Australia. So I want to find out just how creative we can be in terms of the policy levers that we have available to us.

You have just said that you cannot do much about the birth and death rates, really.

Mr R Murray —Certainly, I do not think I need to comment on death rates.

Senator Sherry —With death rates, we can lower smoking, for example—

Senator BERNARDI —We are doing our best, Senator Sherry.

Senator Sherry —I think we could be a bit more—

Senator BERNARDI —The net natural growth rate is how I should describe it.

Senator BUSHBY —I think the death rate works out at 100 per cent!

Senator SHERRY —Okay, let’s leave that one and get back to birth rates.

Mr R Murray —Certainly, successive governments have made advances in that area in terms of overall public policy and there have been significant advances in technology so there is an ongoing increase in life expectancy. Mr Gallagher could give you the details on that. On the overall fertility rates, the issues that appear to be major drivers for developed countries such as Australia are around income for women and education levels of women. In addition to that, where governments can play a part, significant studies by the OECD indicate that family friendly policies—particularly workplace policies and employment policies with respect to childcare—can have an effect.

For instance, where those policies are quite positive—that is, in countries like Australia but particularly in northern Europe—you do have high participation by women in work and also higher fertility rates. It sounds counterintuitive, but women, even though they are on a higher income and have higher education levels, do have higher fertility rates if they feel that they have a positive outcome in their work environment and their child care. So there are some levers there that you could pull but they take a while to come into effect and they, in some ways, are related to how you might change the culture and the outlook around those issues.

Senator BERNARDI —In your modelling for the Intergenerational report you would take some of those issues into account, surely? Mr Gallagher, I see you nodding, so this question will go to you I guess. You forecast not changes in policy settings but improvements in health care and a change in fertility rates; is that correct?

Mr Gallagher —For fertility we look at the trends in age-specific fertility rates and we project each age group on the basis of its trend and that trend continuing. So the big change that we are seeing in Australia is that women under the age of 30 have had declining fertility and women over the age of 30 and women over the age of 35 have had significant rises in fertility. This is associated with women deferring both marriage and childbirth until they are more economically established. The fertility rates, as Richard has been explaining, seem to be most responsive to the opportunity cost of having children. So in societies such as that of Italy, where married women are supposed to leave the labour force, women defer getting married and having children for a very long time. The result is that Italy has a total fertility rate of 1.2 compared to that of Australia, which is running at 1.9.

Senator BERNARDI —To continue along that line: if Australia has a net natural growth rate, which is net births—less the deaths—and no immigration, the forecast in the Intergenerational report I think was 26 million; is that correct?

Mr Gallagher —Yes: 26 or 25.5.

Senator BERNARDI —It was around that mark?

Mr Gallagher —Yes.

Senator BERNARDI —So the balance of the Intergenerational report forecast of an increase in population was—

Mr Gallagher —Yes, but of course migration itself contributes to fertility and will eventually contribute to deaths as well. It will change the natural increase numbers; it is not separate.

Senator BERNARDI —Yes, but in the Intergenerational report 36 million was the forecast.

Mr Gallagher —Yes, so—

Senator BERNARDI —So the figure, in round terms, is 26 million, or 25½ million, if we have no further migration. The balance of it is migration?

Mr Gallagher —Yes.

Senator BERNARDI —So that migration is a key, substantial driver of Australia’s future population growth is a reasonable position to take?

Mr Gallagher —Yes: a substantial driver of our current population growth.

Senator BERNARDI —Do you have to hand the migration figures from last year?

Mr Gallagher —Yes, I do. The last publication we had from the Australian Bureau of Statistics came out on 25 March 2010. It has the Australian demographic statistics. Page 11 of the report gives both the annual migration numbers and the financial year migration numbers, as well as quarterly results.

Senator BERNARDI —Could you give me the figure. I do not have it in front of me.

Mr Gallagher —For 2008-09 net migration was 298, 924 and for calendar year 2008 it was 301,196.

Senator BERNARDI —The figures in the Intergenerational report assume an immigration intake of significantly less than that; is that correct?

Mr Gallagher —That is correct.

Senator BERNARDI —If you extrapolated these figures from, say, 300,000 over the next year for the next 40 years, which is the business as usual case, our population would be quite a bit higher than 36 million.

Mr Gallagher —Our population would be about 43.9 million.

Senator BERNARDI —43.9 million. So does that render the Intergenerational report kind of irrelevant, within the policy settings here?

Mr Gallagher —No. I think that we had probably six or seven reasons for thinking that migration would drop. Firstly, we knew that the Department of Immigration and Citizenship was doing policy reviews and that there would be a review of the skills in demand categories, the 457 categories and the student visa categories. We knew that, in terms of the high student intake of temporary residents, who stay here more than a year and therefore become part of the resident population, there had been a significant number of closures of vocational education and training institutions. We knew when we did the report—remember, we set the assumption back at the end of 2009—there were issues about Indian students which meant that we suspected there would be a drop-off in Indian students. At the time the assumption was set, we also thought that Australia’s economic growth would be affected significantly by the global financial crisis and that unemployment rates—if you remember the budget forecast of the time—would be significantly higher. It was also the case that the Australian dollar was high, which would make it more difficult for overseas students to come in. In looking at the assumption, we considered that factor, and that meant that there was likely to be a drop, and then we considered where that drop might go to. We realised that both the Australian Bureau of Statistics and the Department of Immigration and Citizenship were using assumptions at the level of 180,000 in their own thinking about long-term net migration and so we settled on that level for the purposes of the Intergenerational report.

Senator BERNARDI —This is what I find interesting: you are making assumptions about changes to policy settings in the future, and yet the minister has said on a number of occasions that the Intergenerational report is based on a business as usual approach over the last 40 years. If we were going on business as usual, we would be on track for a 43.9 million population.

Mr Gallagher —It was also the case that if we had looked at the average for the last five or 10 years we would have arrived at a substantially lower net migration figure. If we had looked at the average for the previous five years, I think we would have come out with 180,000 anyway. So it was perfectly consistent. It is the normal thing when you are doing projections, which is that you do not project off the top of a cycle. You do not project off the peak. You assume some return to average levels for a long-term projection.

Senator BERNARDI —That would be assuming that there was a similar policy setting in place. There was a change in government, I am loath to remind you, Mr Gallagher, a couple of years ago!

Mr Gallagher —But the increases in net migration began occurring before the change in government. In 2005-06, on the ABS numbers, net migration was 146,750. In 2006-07, it had already risen to 232,824. Then in 2007-08—and the current government was not elected until November 2007, so it did not have much say in this—the number had already risen to 277,000. The rise was already on.

Senator BERNARDI —But you must have a figure for the average over the period of the previous government. The economic cycle was somewhat different to the one we have got now.

Senator Sherry —Before we go any further with the answer, that was off a figure in 1997-98, under the former government, of 79,200. So if you contrast the movement and in fact—

Senator BERNARDI —That would have been in the guts of ‘the recession we had to have’; is that right?

Senator Sherry —Can I finish my answer.

Senator BERNARDI —You are trying to be misleading.

Senator Sherry —I am entitled to contribute to answers, if I want, without being cut. In fact, I can give you all the figures from 1996-97 through to 2007-08. There is significant long-term growth, and the figures are significantly different from year to year; hence Minister Burke’s reference, which you referred to earlier, about the long-term historical average. You asked for an average, for example, over the last 40 years. I am sure we can—

Senator BERNARDI —No, I did not.

Senator Sherry —If we do not have the figure here now I am sure we can calculate it for you.

Senator Bernardi —I did not ask for an average over the last 40 years; I asked for an average over the life of the previous government.

Senator Sherry —I am sure we can give that to you as well. I am happy to take that on notice if we do not have an average figure here now.

Mr Gallagher —The other rationale for the number is given on page 8 of the Intergenerational report. It shows a graph of what is called the rate of absorption of net overseas migration. That graph shows that the average level of net migration appearing to go back into the 1970s up until recently is about 0.6 per cent per annum. If you took that out, you would get an assumption which is consistent with what we have actually used. There are a variety of averages which supported the use of 180,000 as the net migration assumption, given that on any analysis of the data the number is highly variable.

Senator BERNARDI —The number of migrants?

Mr Gallagher —The number of migrants is highly variable.

Senator BERNARDI —It is highly variable. Has it in recent times, apart from the last financial year, exceeded 300,000?

Mr Gallagher —I suspect that 300,000 would have been a record. I do not know that we got quite that high in terms of post World War II migration. We would have been very high at that point, particularly in relation to population.

Senator BERNARDI —In summary, then, we have had 298,000 in 2008-09 and 301,000 this year.

Mr Gallagher —The 301,000 was for 2008. In 2008-09 it was 298,000. So there was a slight drop there.

Senator BERNARDI —It has averaged 300,000?

Mr Gallagher —Yes, basically.

CHAIR —Before we go too much further, I am assuming that we will finish with the population section by the afternoon tea break at three o’clock and then finish the rest. Is that everyone’s understanding?

Senator BERNARDI —I am looking at Senator Brown, who probably has a few questions of his own. Would you be happy to divide the time, Senator Brown?

Senator BOB BROWN —Yes.

CHAIR —Do you want to go to Senator Brown and then take it up to three o’clock?

Senator BERNARDI —I am happy to, but I do have about another 10 minutes or so, or 15 minutes, if I can have them.

Senator BOB BROWN —Yes, I expect you will have that, at least.

Senator BERNARDI —Okay, then I am happy to cede to Senator Brown.

Senator BOB BROWN —Is economic growth predicated on population growth?

Mr Gallagher —The framework that we used for the Intergenerational report is often described as the three-P framework: productivity, participation and population. The total size of GDP is influenced by each of those factors and all combined.

Senator BOB BROWN —Is it possible to have economic growth without population growth?

Mr Gallagher —With increasing participation and increasing labour productivity it is possible to have economic growth, as is discussed. At the moment we have about 260,000 births on 130,000 deaths a year. You will get population growth from natural increase. It is very hard to stop population growth in Australia. As we have been discussing, the lever is overmigration.

Senator BOB BROWN —Yes, but I am really interested to hear from Treasury that it is possible to have economic growth without population growth. Could you tell the committee how that scenario may unfold?

Mr Gallagher —I think that, as we have already discussed, even if we went to zero net migration, we would end up with population growth to 25 or 26 million people. In that scenario there could be increasing labour force participation, which would contribute to economic growth. Certainly you would hope that there would be growth in labour productivity that would contribute.

Senator BOB BROWN —Ultimately we are in a finite world and we have to accept that population globally has to stop growing.

Senator Sherry —I think that is an opinion, Senator Brown.

Senator BOB BROWN —I am asking what your view on that is.

Senator Sherry —I do not accept that.

Senator BOB BROWN —You do not accept there is any limit to population growth?

Senator Sherry —It is an argument just as much as a question. I do not accept it and, if Minister Burke has anything more to add in detail, I will take it on notice for him to give you are response.

Senator BOB BROWN —Thank you. So you see infinite population growth as the reality that we have on the planet?

Senator Sherry —I did not say that. I said I do not agree with your view and the way you put your question. I am more than happy to take it on notice to get you some more detail from Minister Burke.

Senator BOB BROWN —With the projection of current immigration and population being in excess of 40 million by midcentury, what would the population of Sydney and Melbourne be under those circumstances?

Mr Gallagher —We have not done a regional analysis on the high projection growth. We have done a regional analysis which is consistent with the central projection in the intergenerational report. I have not brought that with me, but essentially we were looking at the major cities almost doubling in size. Given that we are at 22 million people now, to get to 35.9 million we are adding a considerable amount to the population and the history of regional growth in Australia is that most of the growth has been in the major cities on the coast.

Senator BOB BROWN —Has Treasury done an estimate of the cost of the infrastructure that would be required to facilitate, with increasing living standards, those populations in Sydney and Melbourne of about 7 million by midcentury?

Mr Gallagher —I have not. I do not know if anyone else has.

Mr Murray —We have not done that. That is not to say we are not going to do that. There is certainly analysis that can be done around the sorts of needs there might be for infrastructure. A lot of that would be at a fairly macro level, but there are some metrics that you could use that relate infrastructure back to what the stock of infrastructure that we have now is, what the growth of economic activity will be and what the relationship would be back to the need for infrastructure. A lot of that is quite difficult and relates to what the policy settings you might have around the supply of infrastructure are, for instance, around water. What are you going to do around the pricing of water? What are you going to do around the trading of water and trading between urban water and rural and industrial water? So a lot of that is fairly difficult, but it is possible. Like a lot of this modelling, it would take significant effort. Infrastructure Australia have been tasked with at least looking at the near to medium term in terms of certain areas of infrastructure needs and hopefully a lot of their analysis will shed some light on some of these questions.

Senator JOYCE —You have brought up water and we have before us the Wentworth report that talks about a 30 per cent reduction in water for the Murray-Darling Basin. So when these 22 million people turn up, what are they going to eat?

Mr Murray —I think people have to think pretty carefully about issues around food and food production. Trying to project forward what is going to happen to the industrial structure of Australia is pretty difficult. There will be a lot of market forces going on and a lot of factors will come into play.

Senator BOB BROWN —Just on that question, coming from what Senator Joyce asked, you are using current food production in Australia. Would that be adequate for a population of 36 million?

Mr Murray —I do not know. We are a significant exporter of food at present. What happens in the overall trade is an important issue, and what happens in the overall effects, say, on our terms of trade is again an important factor in terms of driving the economy.

Senator BOB BROWN —Could you take that—

Senator Sherry —We can take on notice—

Mr Murray —But also, Senator Brown, if we are looking at projected population figures, I think we would provide you with not just current net production figures in agriculture but net projected agricultural figures, because there will be productivity improvements and output improvements that may be identified. I do not know whether those figures are available but we will certainly supply them.

Senator BOB BROWN —Minister, have you taken into account the Garnaut report which estimates that on current climate change projections with business as usual, productivity in the Murray-Darling Basin may be reduced by over 90 per cent this century.

Senator JOYCE —Then you will be very hungry.

Senator BOB BROWN —Have you correlated that with the population growth that is being projected here?

Senator Sherry —What I have indicated here, Senator Brown, is that we will take on notice what you started to ask for and which I think I anticipated, which is the current net surplus agricultural production for Australia and also, if it is available and I do not know whether it is, the projected surplus of agricultural production in what I think is the relevant year here, which is 2050.

Senator BOB BROWN —Yes, whether the current food production would be enough for that population.

Senator Sherry —And also the projected food production is enough for the projected population.

Senator BOB BROWN —You may do that. I am not asking that question. I am asking the question about current—

Senator Sherry —I am always trying to be helpful so if we have got that figure I will provide that as well.

Senator BOB BROWN —And I will get it back to you as an answer to your question. Is Treasury tracking the rapidly diminishing food reserves of planet Earth in view of the growing population?

Mr Murray —Not that I am aware of.

Senator BOB BROWN —Would you—?

Mr Murray —Well, the answer is no.

Senator BOB BROWN —Would you have a look at that and come back to me with how Treasury assesses those figures—from the UN.

Mr Murray —We can certainly take that on notice.

Senator BOB BROWN —The UN report that is flagged in the Guardian Weekly and in a number of newspapers, with an article indeed in the Hobart Mercury this week, projects that loss of biodiversity on current projections on the planet will cause the global economy to be hit to the value of $3 trillion to $4 trillion by the end of the century. Has Treasury got any assessment of that cost of loss of biodiversity on the planet at current rates?

Mr Murray —Not that I am aware of.

Senator BOB BROWN —Would Treasury look at the Guardian Weekly report of that UN report which is coming out in October and give the committee its assessment of the biodiversity factor in assessing future economic wellbeing in a country that is losing biodiversity at one of the highest rates in the world.

Mr Murray —I will certainly take that on notice. Whether we have the wherewithal—the expertise—to do that is another matter. Certainly if we do then we will be able to supply an answer.

Senator BOB BROWN —As part of this population assessment—and we have talked about immigration—has Treasury done any assessment of the UN projection that there will be 150 million people moving on the planet and seeking other domicile by the year 2050 due to climate change alone.

Mr Murray —No.

Senator BOB BROWN —Would Treasury look at that figure and see if it can assess what impact that may have on Australia?

Mr Murray —We will take that on notice.

Senator BOB BROWN —Thank you very much.

 [2.39 am]

—I want to ask a question with respect to the discussion that we had before about child-care.

Senator BERNARDI —Are we on population now?

CHAIR —Yes.

Senator PRATT —Thank you. I understand that there was a Treasury working paper published in April on the responsiveness of female labour supply to child-care costs. This showed that the effects of child-care costs on labour supply were indeed statistically significant—I appreciate that this might not actually be your report—and on that basis is it true to say that changes—

Senator Sherry —Senator, sorry to cut you off, but that is actually for revenue group. It would have to go to revenue group.

Senator PRATT —If you would let me conclude the question you would find that it is not about the report necessarily.

Senator Sherry —I have just been advised that it needed to go to revenue group.

Senator PRATT —On the basis of what that report found, my question is: is it true to say that child-care costs could have a significant impact not only on birth rates but also on workforce participation rates in the future and thus mitigate the effects of an ageing population, particularly when we are looking at trying to keep in balance the ratio of workers versus those that the community supports?

Mr R Murray —Senator, I am not across that particular analysis. We could certainly take on notice where it relates to that analysis. Just from a general proposition, as I have pointed out previously and as Mr Gallagher has pointed out, at least the OECD studies and some country studies indicate that there is a positive relationship between participation and family-friendly policies, including child care. They also have a positive effect on fertility.

Senator PRATT —Great. Thank you.

Senator BERNARDI —I want to go back to the task force, and so I will go back to you, Mr Murray. You have 12 months worth of additional funding for the task force—$1.3 million.

Mr R Murray —Yes.

Senator BERNARDI —Your reporting date is when?

Mr R Murray —We are anticipating probably about the middle of 2011—certainly in that first half of 2011. We are keeping it a bit flexible.

Senator BERNARDI —The minister has said that it is 12 months, which would take it to April.

Mr R Murray —Yes. I will put it this way: around about April.

Senator BERNARDI —You have funding for 12 months from June.

Mr R Murray —We have 12 months funding.

Senator BERNARDI —That is fine. What is the process of the consultation that you intend to undertake?

Mr R Murray —The minister and we are having discussions around all of that, so that has not been settled as yet. Certainly between the minister and us, we are making significant planning at least for the first stage of consultation. Prime Minister has in his press release made a commitment to an open consultation process, and that is our terms of reference on that.

Senator BERNARDI —Can you detail what the first round of consultations will be?

Mr R Murray —I cannot because that would be pre-empting decisions that the minister needs to make around that.

Senator BERNARDI —The minister has repeatedly said that 12 months is a very tight time frame to do this major task and that there was going to be a broad range of consultation two months into it. There has still been nothing decided. Is that what you are telling me?

Mr R Murray —No. I am not saying that the minister has not made decisions. He clearly has in his own mind and we have assisted him in coming to some of those decisions about what the first phase of consultation would be between now and, say, over the next six months, because we do need a significant amount of time in the first phase of actually getting across all the issues. You can hear from Senator Brown one side of all of these issues, and they are pretty complicated. There are a lot of trade-offs between a lot of the issues. So we want to have a reasonable amount of time over this first consultation period so that we can get all the issues on the table and all the issues discussed.

Senator BERNARDI —My concern is that there are a huge number of issues to be considered; it crosses over an enormous number of portfolio areas. There was clearly very little consultation before the announcement. There has been nothing concrete announced since the announcement by the minister. I am looking at his website. He has not put out one press release about it or anything else.

Senator Sherry —Your questions are going to the role of the minister. In terms of the minister, I know firsthand that, in gathering briefs, material and information in his own responsibilities, he sought—by way of example—a very significant set of data from the Australian Bureau of Statistics on population issues as well as face-to-face briefings. I know this because I have responsibility for the Australian Bureau of Statistics, so I signed off on the briefs and the documents. So that is an example of preparatory work. Just because a minister does not issue a press release does not mean that he is not focused on the job at hand.

Mr R Murray —I add to that that it is not as if we or the minister have been sitting around twiddling our thumbs. The minister has been trying to absorb as much information he can around this whole topic and having discussions and multiple meetings with a whole range of people. I am not quite sure how many, but it certainly must—

Senator BERNARDI —You would be able to take it on notice, wouldn’t you—

Senator Sherry —I will take that on notice.

Senator BERNARDI —Who he has met with and the times he has met with them?

Senator Sherry —I do not necessarily believe we will be disclosing who he has met with. That is up to the minister. As you very well know, no ministers current or past in this place have disclosed their diaries. That has not been the practice. But I will take it on notice, and I am sure we can give you an indication of the—

Senator EGGLESTON —Posthumously!

Senator Sherry —Pardon?

Senator BERNARDI —The Latham Diaries. He helped us out!

Mr R Murray —We want to get to a position where we have a more structured program of consultations, and that is where the minister is moving. You are asking me to answer questions on the minister’s behalf, and I just cannot pre-empt what he is going to say.

Senator BERNARDI —Time is short. Would you be to take on notice to undertake to provide me with the times and dates of briefings that your department has provided to the minister in regard to population policies?

Senator Sherry —Will take it on notice.

Mr R Murray —We will certainly do that.

Senator BERNARDI —Would you be to also take on notice and provide a list of key stakeholders that you consider in this debate?

Mr R Murray —What do you mean by ‘that we consider in this debate’?

Senator BERNARDI —I mean those that you are going to include as part of the consultation process.

Mr R Murray —We can certainly take that on notice. Like every other part of advising, we are not the decision-makers in any of this. The fact that we consider somebody to be a key stakeholder is neither here nor there, quite frankly.

Senator BERNARDI —It certainly is important.

Mr R Murray —But we will certainly take this on notice and we will see what we can—

Senator BERNARDI —It is important because if you say that these are key stakeholders that you consider and the minister chooses to ignore those, that is the minister’s decision. So it is important.

Mr R Murray —If you were to ask me what I thought were the groups of interests around this particular topic, I would say to you that you can just hear from the questioning today that there are significant environmental issues. Some people would consider that they should be looked at in a more global sense, and that is pretty difficult. There are obviously issues around economic growth and industrial development around that. There are issues around food. There are certainly significant issues around the building, delivery, pricing et cetera of infrastructure.

There are obvious interest groups out there covering all of these areas, and they are the sorts of areas that we will need to cover off in any consultation. The consultation might cover the not-for-profit interest groups, various sectors of industry—some of them have differing interests in this issue—and certainly those, both public and private, who supply infrastructure and demand infrastructure. So there is a whole range of people from the private sector, the public sector and academia. We would want to try to cover off as much of that as we possibly can.

Senator BERNARDI —Okay. Has your task force been asked to undertake any modelling with regard to the population capacity of Australia?

Mr Murray —No, and I do not know that that is within the terms of reference. If you read the Prime Minister’s press release carefully, he is talking about likely trajectories for population. He then asked us to look at the various constraints around that. I really doubt whether that gets you to some sophisticated modelling about what Australia’s carrying capacity is. I think that is probably an impossible task because it is dependent on so many outcomes around things like climate change and productivity growth in various sectors, including the food sector. It is around a whole lot of things where you have to make assumptions that we are a small economy in a whole trading world.

Whether you can actually model those sorts of things, I do not know. There were those who thought that this planet could handle 6 billion, and now the UN numbers, as I understand them, have the population stabilising at 9 billion. Even 20 or 30 years ago, people did not think that was possible. Certainly, if you had said 50 years ago that there were going to be nine or 10 billion people on the planet people would not have believed that.

Senator BERNARDI —I guess that any kind of modelling out to 2050 cannot foresee all the ups and downs of the economic cycle or growth cycle, can it?

Mr Murray —It does not necessarily need to see the ups and downs of the economic cycle. This is the whole point of the discussion you had with Mr Gallagher about what level of migration we should be assuming. To do some averaging around that, rather than taking the top of the cycle, is actually very sensible. You do not necessarily have to do anything necessarily about cycles; you have to look at what the long-term trends are and what the sensible and likely long-term trends are. However, no matter what you come up with, I can assure you that it is not going to be right; but it may be in the ballpark.

Senator BERNARDI —We have seen that in the climate change modelling, and the furphies that have been in there. That is off topic, though, isn’t it Minister?

Senator Sherry —That is off the topic, and it is also a political debate, so if you have got a question of relevance to the officer, please pose it.

Senator BERNARDI —No, it is not a political debate.

0Senator Sterle interjecting

Senator BERNARDI —Gee whiz, that would be the first intelligent contribution from you, Senator Sterle.

Senator STERLE —It’s a replay of Q & A. You looked like a goose.

Senator BRANDIS —It will be a long time before you are invited onto Q & A, Senator Sterle.

Senator STERLE —That will not upset me.

CHAIR —Senator Bernardi is trying to ask his questions, Senator Brandis and Senator Sterle; can we have a little quiet.

Senator BERNARDI —I am surprised that Senator Sterle could start that one

Senator BERNARDI —Mr Murray, have you been asked to do any modelling to test the limits of the growth capacity of cities?

Mr Murray —No.

Senator BERNARDI —Is that going to be part of your terms of reference?

Mr Murray —I do not know. We will certainly be looking at what the tensions and constraints are going to be around, for instance, development of the cities. It is not pretty hard to guess that they have already got tensions, and a lot of the planning processes and the delivery of infrastructure have been pretty poor. There are a lot of issues, and a lot of policy issues to look at in relation to a lot of that.

Senator BERNARDI —I am trying to reconcile some of the statements that the minister has made with what you are telling me. He has said that your job is—he did not use the term ‘carrying capacity of Australia’—‘to test the limits of the growth capacity of cities.’ Your responsibility is to come up with modelling and to say that this is where we would be under current things, and if you reduce that then this is where we would be et cetera. His job is to say where we should land. Ultimately, there is going to have to be a population target for Australia, isn’t there?

Mr Murray —I do not know why you would come to the conclusion that we are going to have a population target. You may, at the end of the day, end up with scenarios that give you a sensible range about where we might land under sensible scenarios. We have already, out of our central scenario, given numbers about what might be the populations of some of our major cities. That certainly will then open up a whole lot of questions about what those cities look like and what the constraints are, but also about what the opportunities here are for making some sensible reforms and some sensible changes about the way we approach, for instance, urban development. But there are a lot of other issues as well. This whole debate is not just about the cities. There are a whole lot of different regions out there. Whether it is the major tourist towns and cities whether it is how we are going to cope with some of the resource towns and cities as well. There is a whole range of issues and a lot of it is different from region to region. We will try as best we can to at least measure some of that, but there may be limitations just within the data itself on a region by region basis. But we are certainly going to attempt, as far as we possibly can, to look at regional issues and to try and measure the population issues and the constraints there.

Senator BERNARDI —Mr Murray, we do not have any more time. I will put the rest of my questions on notice. If you could respond to them in as timely a manner as possible, that would be appreciated.

Mr Murray —I will.

CHAIR —Thank you. As there are no more questions on population, we will go to the afternoon tea break.

Proceedings suspended from 2.56 pm to 3.13 pm

CHAIR —Welcome back. The committee will resume. We are with fiscal group and Senator Cameron has a couple of questions.

Senator CAMERON —I wanted to ask about the total number of employees in the department.

Mr Murray —Our staffing numbers are around 1,000. At the moment, for instance, we have about 1,030 staff. On average for 2009-10 we are looking at about 1,000. At the moment we are a little higher because in February we had a very large graduate intake of 75. That is the largest intake we have had. But then with attrition over the year the average for 2009-10 is about 1,000. In the portfolio budget statement we have said 1,005.

Senator CAMERON —And what is your turnover of staff?

Mr R Murray —Up until 2009—and so impacting a lot on 2009-10—the attrition rate was somewhere around 12 per cent.

Senator CAMERON —Twelve per cent.

Mr R Murray —At times it has been lower than that, going back earlier in this decade, but for about three or four years, up to 2008-09, it was about 12 per cent. In 2009-10 it has actually fallen to about eight to 10 per cent. A lot of that, we suspect, is around the financial crisis and the state of the financial sector. Even though it has weathered the storm quite well, for a while the outlook in that sector was not good. That was reflected, again, in our graduate program. We took 75 graduates and all of them were of very high quality. We had, I think, over a thousand applicants—and a lot of them were of very high quality—again reflecting the downturn. However, the early indications for 2010-11 are that we think the attrition rate will return to about 12 per cent, something like that. That is what we are budgeting for.

Senator CAMERON —Generally, you cannot really make an estimate of who might resign or whatever. You might have an idea about your retirements, but your resignations are completely uncontrollable, aren’t they?

Mr R Murray —They are. So what do we do? For 2010-11, we are trying to sort it all out in detail at the moment. We are budgeting, as set out here in the portfolio budget statement, for 1,010 staff. We will start the year with about 1,030 and we think that, with an attrition rate of about 12 per cent, we might lose 75 or 80 people during the year. So we look at it at a very high macro level. We are assuming at this stage that in February we will have another graduate intake of about 75, and through the year we have two fairly big what we call bulk recruitment rounds, where we might bring in five to 10 people in both those rounds from outside the Treasury. That is the sort of planning we have got at the moment, and that is what our budget is built on.

Senator CAMERON —Are you a major employer of graduates amongst the Public Service in Canberra?

Mr R Murray —We are a major employer of top economists. An agency of 1,000 is probably reasonably big for a central policy department, but there are other departments that are much bigger than us. How big their graduate programs are, I am not sure. Certainly, we target the best economists that we can get but we also target lawyers because we have significant responsibilities in terms of tax and company law, competition policy and prudential and financial regulation. We do target commerce-accounting graduates as well.

Senator CAMERON —So you are looking at about a five per cent increase from where you are. If you could not do that increase and you were faced with a two-year freeze, you would be looking at 240 fewer employees in the department. How would that affect the operation of your department?

Mr R Murray —Just going to the start of your question, we are not budgeting for any increase. We are at around 1,000 staff, so 1,010 staff is around that.

Senator CAMERON —I thought you said you were going up, that was all.

Mr R Murray —No. We have grown a lot over the last decade, but we are now stabilised at around 1,000 and we are moving priorities. So we are around that level. With an attrition rate of about 12 per cent, on average we would probably lose about 75 to 80 staff a year. I have not thought about what it means over two years, I have to admit, and there may be some cumulative effect.

Senator CAMERON —There are proposals that there should be a staff freeze in the Public Service, so if you lose 150 staff and they are not replaced doesn’t that have significant issues for you?

Mr R Murray —I will answer it this way: the graduate intake has traditionally been our lifeblood and, if we have difficulties around that graduate intake, that is always a problem for us. So in a year when the financial sector is going gangbusters, for instance, that might be a bleak year for us and that can be a bleak outlook then for our overall capacity.

We also have put more emphasis on our bulk rounds during the year bringing lateral recruitment in and we have also done a lot more recruiting at very high levels as well, getting in very specialised people—financial people, for instance, people that understand financial markets. We have some of those that have a detailed knowledge of the financial markets. So anything that interfered with any of those three would raise some issues.

Senator CAMERON —What issues would they be?

Mr R Murray —They are all issues around capability.

Senator CAMERON —What are those capability issues?

Mr R Murray —We need expertise in various areas about economics, about modelling, about the financial sector, about law and commerce, and if we do not have that expertise then our ability to produce outputs is a bit restricted. We always get by. We have in the past and freezes come and go. I have been around a long time, Senator. Freezes do come and go and you do tend to have to adapt, but a two-year freeze would be pretty long.

Senator CAMERON —I am told that a two-year freeze has got implications longer than the two years because you have lost that recruitment of young graduates and then you have to try to play catch-up or you have to use contract input. Is that an option?

Mr R Murray —That has been so. When we have had lean years, that has been our experience.

Senator CAMERON —So when you have faced freezes before have you used contract to deal with it?

Mr R Murray —I am not sure that we have done that. Some other departments have.

Senator CAMERON —So savings that can be budgeted from reducing the head count might be diminished by bringing contract labour in to try to fill the gap created in key areas.

Mr R Murray —Yes, but I am not sure then what the objective of the freeze is.

Senator CAMERON —I am wondering the same thing, if in your experience in the past, contract labour has been brought in. But that is fine, thank you very much.

Senator JOYCE —Just before I start—and I know we have moved on from population—in the population assessment, Mr Murray, did you also look at what the development of regional areas would be?

Mr R Murray —Yes. We intend to do that and there are a lot of important issues. While you were out I did explain that. We do intend to look as closely as we can and it does not matter whether you define a region as out of Sydney or North Queensland or the Kimberley, for instance—

Senator Sherry —You should add Tasmania to that—

Senator JOYCE —West Coast.

Senator Sherry —I am in great agreement with you. Tassie has a population of half a million, significant surplus water, agricultural production, perfect climate, great people, including Senator Bushby—a fantastic place to live. I could just go on and on.

Senator JOYCE —Minister, this does not happen very often, but I agree with you entirely

Senator Sherry —Fantastic. I will make sure that Tassie is on that list—

Senator JOYCE —There is no reason to have a parliament at all; we are all in agreement. But what about all the infrastructure you are going to have to put in? I think it is a great idea. If you are going to have a population growth then have it in the regions, because there are exponential costs to growing cities, aren’t there?

Mr R Murray —Not necessarily. Quite often public policy makers like to think that they can engineer a lot of this. But quite often a lot of this is driven by people’s own choices and by economic forces. Whether you can engineer movements of population beyond that is always a difficult issue. There is always a difficult issue around regional development. However, having said that, sometimes there are efficiencies in doing regional development and sometimes there are efficiencies in having cities. Cities are highly efficient. It does not mean Australian cities are highly efficient. Australian cities could be far more efficient. It is just from an economic point of view.

Senator JOYCE —If we look at the cost growth at the moment, we have just spent $1.8 billion on a bridge in Brisbane and another $2.2 billion on a tunnel. If that sort of investment or even a portion of that investment occurred in a regional area, surely you would have a vastly greater bang for your buck because you are on a greenfield area and you are not actually stopping the traffic and doing all these things to expand the infrastructure that is required.

Mr R Murray —That may be the case, but countering that there are a lot of opportunities within cities, some of them big, some of them limited, to use better the infrastructure that is already there.

Senator JOYCE —If we were prepared to stack one Perth person on top of another in flats, we could get efficiencies.

Mr R Murray —I do not look upon that as efficiency. The fact that we have cities that are very spread out makes us certainly, in the developed world, apart from the United States, fairly unique. There are a lot of different ways you can design a city. A part of what we want to do with this population strategy is try and look at some of the issues. If you are going to look at more efficient cities, for instance, you better look at how well planned they are and how good an environment you are creating for people. It is not about dumping people on top of one another.

Senator JOYCE —If you have going to have another five million people living in Sydney, I am sure the people of Sydney are going to be thrilled to hear that they are coming. In your analysis, are you going to do a comparative analysis between the cost of development of Sydney to deal with five million people as opposed to developing other inland regional areas to cope with the same population?

Mr R Murray —I do not know. I could not say at this stage.

Senator JOYCE —Can you explain to me what a growth dividend is, Mr Ray?

Mr Ray —A growth dividend is a colloquial term for a summary second-round impact of a major policy change.

Senator JOYCE —Of an imagined policy change?

Mr Ray —No, a major policy change.

Senator JOYCE —What is the growth dividend that is currently in the budget for the final two years of the forward estimates?

Mr Ray —You are asking the wrong group. That is why we are having trouble finding it.

Senator JOYCE —It is about $600 million.

Mr Ray —It is about $600 million.

Senator JOYCE —How do we get that money? Where does that money come from?

Mr Ray —That money comes from having a larger economy as a result of the measures in the package.

Senator JOYCE —A larger economy?

Mr Ray —Yes.

Senator JOYCE —From what?

Mr Ray —The government’s tax plan. It is explained in the budget papers, in the first sentence of the measure description: ‘The government’s tax plan will promote growth across the entire economy.’ That economy will provide a growth dividend in terms of higher tax receipts and lower—

Senator JOYCE —So the resource super profits tax makes the economy bigger?

Mr Ray —The modelling is that the tax package as a whole makes the economy larger.

Senator JOYCE —So this new tax is going to make everything bigger?

Senator Sherry —He did not say that. He just gave you the answer—the package as a whole, Senator.

Senator JOYCE —What part of the package makes the economy grow?

Mr Ray —You are talking to the wrong group, because we are not responsible for this package. I will try to help you a little bit, but you really need to talk to the experts. The lower company tax rate and the effective removal of royalties are the two biggest components.

Senator JOYCE —But the royalties are really just replaced by a federal government rent, aren’t they?

Mr Ray —I think you have had long discussions with both Dr Henry and with the Revenue Group about this. Just to give you an example, when the royalty regime in Bass Strait was replaced by PRRT, the life and the production out of those wells was larger than had been expected under a royalty regime.

Senator JOYCE —What was the growth dividend we got from that?

Mr Ray —That measure was not large enough—

Senator JOYCE —To measure.

Mr Ray —to measure.

Senator Sherry —We can certainly take it on notice. In fact, I think it is a very good idea, Senator Joyce—

Senator JOYCE —Doesn’t it seem a little bit fortuitous—

Senator Sherry —Just let me finish my answer.

Senator JOYCE —I have not asked you a question, so what is the answer?

Senator Sherry —You did.

Senator JOYCE —I have not asked you any questions, but I am glad I am about to get an answer to a question I never asked. I am fascinated as to what it will be.

Senator Sherry —Senator, Mr Ray has indicated that there was no modelling, no analysis done of that. I am sure there are other areas, such as when the PRRT was introduced more broadly across the economy and when the tax on the gold sector was introduced that Treasury would have done some analysis. I am sure they were right. When we look back historically at the ridiculous and extraordinary claims made against those tax changes, if we do have any modelling analysis of those two measures, for example—I will take it on notice; we will get Treasury to scour their records—I am sure that their analysis turned out to be correct.

Senator JOYCE —You are very sure, aren’t you.

Senator Sherry —History tells us Treasury was correct.

Mr Ray —I might just add that we have published material on how we have thought about second-round effects in the past—I think in the Treasury round-up a couple of years ago. While we accept that many measures have second-round effects, both the timing and the quantification of those is generally quite difficult. In the case of large packages it has been the practice for some time to come up with some estimate. It was done when the ANTs package, the GST package, was introduced and it was done in the Ralph business tax reforms.

Senator JOYCE —Seeing the minister is so sure, can the minister tell me what the growth dividend was from the petroleum resource rent tax? You are sure—you must know what it is.

Senator Sherry —What I am very confident of, as I have already said, is that the claims made by Treasury at the time would be accurate and—

—So you believe there was a growth dividend?

Senator Sherry —Can I finish my answer. I talked about the analysis, the projections. I did not specifically refer to the growth dividend.

Senator JOYCE —You did not refer to the growth dividend. You were not sure about the growth dividend, were you?

Senator Sherry —Can I finish my answer. If there is a growth dividend analysis of—

Senator JOYCE —If there is a growth dividend analysis—you are getting less sure by the moment.

Senator Sherry —If there is a growth dividend analysis as part of the overall analysis of the impact of those two particular measures I have just referred to, I am more than happy for Treasury to go through those records and come up with that analysis. As I have said, if you look at the analysis of those two particular measures which were introduced, particularly against some of the extraordinary, exaggerated claims that were made at the time by those who claimed they were going to be hurt by those two measures, I am very confident that the Treasury analysis would have been accurate.

Senator JOYCE —I am glad, Minister, that in the space of 90 seconds you have gone from ‘sure’ to ‘if’.

Senator Sherry —No, I am sure of the—

Senator JOYCE —The question is ‘if’. So let us go to the question ‘if’—

Senator Sherry —Do not verbal me. I have been around long enough to know and I have been around long enough to know that I can be allowed to complete my answer.

Senator JOYCE —It seems fortuitous that we would have this notional revenue in the time that we need a surplus.

Senator Sherry —Can I complete my answer?

CHAIR —Certainly, Senator Sherry.

Senator Sherry —Thank you.

Senator JOYCE —To which question? To which question, Minister, are you repeating the answer to?

Senator Sherry —You just attempted to verbal me. You said ‘if’. What I am saying is that I am very confident that the Treasury analysis of the two measures that I have referred to, PRRT and the taxation of gold, is accurate. I am very confident of the analysis and the forecasts, if that included a second-round effect. I am very confident that the analysis, projections, commentary and forecasts—the whole package, if you like—was right. I am very, very confident, particularly in contrast to these extraordinary claims—

Senator JOYCE —I have not got a clue as to what question you are currently answering, but you are certainly occupying a lot of time doing it.

Senator Sherry —I am just finishing my answer. You pose these questions.

Senator JOYCE —If this is your tactic to not answer questions just come out and say so.

CHAIR —Senator Joyce, I think if you allow the minister to finish quickly, you can move on.

Senator Sherry —As I said, I have great confidence that the Treasury analysis at the time—compared to the extraordinary claims about the destruction of industry, the sky falling in and the industry disappearing et cetera—was correct.

Senator JOYCE —Can you tell me what the question was that you were just answering then? What was the question? Where did all that palaver come from?

CHAIR —Senator Joyce, would you like to go on to your next question now, please, rather than—

Senator JOYCE —I want to ask questions that get answered, not have answers given to questions that were never asked.

Senator CAMERON —Like: why was I sacked?

CHAIR —Senator Joyce, I would suggest that you cease the habit of rephrasing people’s answers in the way in which you prefer.

Senator JOYCE —This is the Labor Party tactic; here it comes.

Senator Sherry —We have all the witnesses here—expert witnesses. Senator Joyce should just stop wasting time and allow the witnesses to get on with giving their answers.

CHAIR —Senator Joyce, your next question, please.

Senator JOYCE —You are incredible! Is this growth dividend consistent with the underlying economic assumptions on which the projected budget outcomes are based?

Mr Ray —The growth dividend comes from the measure, and it is consistent with the modelling that was commissioned from KPMG Econtech.

Senator JOYCE —So the growth dividend is consistent with which KPMG report?

Mr Ray —The report that you discussed with my colleagues yesterday.

Senator JOYCE —Which is the?

Senator Sherry —This is the one that we discussed yesterday, Senator Joyce. I am just trying to be helpful.

Senator JOYCE —There are two KPMG reports. As you would know, Minister, there are two KPMG reports out at the moment, aren’t there?

Senator Sherry —Yes. This is the report of 30 April 2010, extended 14 May. We believe that is the report.

Senator JOYCE —There is another one out at the moment. You are aware of that, aren’t you?

Senator Sherry —No, I am not.

Senator JOYCE —Well, there is. It was put out by KPMG for the mining sector. It shows completely different outcomes.

Senator CAMERON —That is the Minerals Council. He who pays the piper, eh?

Senator JOYCE —I will take that interjection. Who paid for the first report? Senator Cameron has just said, ‘He who pays the piper calls the tune.’ So who paid for the KPMG Econtech report, Mr Ray? Who paid for it, Mr Ray? Who paid for that report? Who paid for that report—the first one, Mr Ray?

Mr Ray —You are asking the wrong person—

Senator JOYCE —Minister, who paid for that report? I am following up an interjection from your colleague, Senator Cameron. Who paid for that report?

Senator Sherry —It is revenue. I will have to take it on notice for revenue.

Senator JOYCE —You will have to take that on notice? Did the government pay for it, Minister.

Senator Sherry —Certainly I accept that the government paid for it.

Senator JOYCE —The government paid for it. You heard Senator Cameron say, ‘He who pays the piper calls the tune.’ Did you hear him say that?

Senator CAMERON —That is Mitch Hooke that does that, you know, those people who have got you in their pocket. The Minerals Council have got you in their pocket.

Senator JOYCE —Don’t you agree that many, perhaps most, major policies of government have any effect on economic growth?

Mr Ray —I think I have already answered that question, Senator. We agree that many policy decisions have second-round impacts on the economy which feed back through to the budget. A lot of those effects can be negative. Were we able to quantify those and put reasonably reliable estimates on them, then we would do so when we cost revenue measures, and our colleagues in the department of finance would do so when they cost expense measures. For the reasons that we have put on the public record time and time again, that is an inherently difficult exercise for smaller measures. In the case of larger packages that they have tended to be, we have put estimates on the so-called growth dividend, and I gave you the two examples of the Ralph tax package and the ANTS package.

Senator JOYCE —Let us come up with another substantial package. What about the $16.2 billion you spent on halls and other eclectic tokenistic rubbish around the back of schools? What is the growth dividend from that?

Senator Sherry —Really, Senator!

Mr Ray —Again, Senator, I think you should be asking my colleagues from the Macroeconomic Group. Estimates have been published on the impact of the stimulus package on the economy and they are in the budget papers.

Senator Sherry —Senator Joyce, we had a discussion about this this morning in Macro, as I recall.

Senator CAMERON —You should get your act together.

Senator Sherry —You continue to waste time, Senator Joyce, with incessant repetition of questions.

Senator JOYCE —On a point of order, Madam Chair: this is merely a tactic by the Labor Party to answer a non-existent question. Minister Sherry is very good at it. He goes on with a dissertation to gobble up time.

CHAIR —I do not think you need to continue.

Senator Sherry —My contribution then was very brief. I was just pointing out he has already asked the question in Macro this morning and he is wasting time.

CHAIR —Mr Ray, do you have anything more to say.

Mr Ray —I will try to help. Again, you should be asking the relevant people, but when the economic forecasts were put together for the 2009-10 budget I am confident that they took into account the impact of that sort of direct public investment.

Senator JOYCE —Could you have an anti-dividend on a certain program? If you get a growth dividend can you get a growth shrinkage, or however you like to term it?

Mr Ray —Sure. You can have a policy which distorted resource allocation and you have lower growth.

Senator JOYCE —A distortion of resource allocation? Do you think that investing $16.2 billion in overpriced school halls is a distortion of resource allocation?

Mr Ray —You have to think about the economic conditions at the time. There was a deficiency of aggregate demand. In a world in which you have a deficiency of aggregate demand, providing a stimulus to aggregate demand is not likely to be distorting.

Senator JOYCE —What period of time was that, when there was the deficiency in aggregate demand?

Mr Ray —At the beginning of 2009.

Senator JOYCE —So why are we still spending the money now?

Mr Ray —The program has time to run, Senator. As you discussed with Dr Gruen earlier today, the contribution to growth from the stimulus withdrawal is negative.

Senator JOYCE —So it would be fair to say that if this is a misallocation of resources we could be getting an anti-dividend or a shrinkage from the building the school hall revolution package?

Mr Ray —The contribution to growth of the stimulus package I think turns negative in 2010. Again, you discussed this at length with my colleagues.

Senator JOYCE —Is there anywhere else the growth dividend is on except your resource super profits tax—not yours, but the governments?

Mr Ray —The growth dividend is on the tax package, and the two major components that contribute to that are the reduction in the company income tax rate and the resource super profits tax.

Senator JOYCE —It is nowhere else to be found in the budget?

Mr Ray —As I have said to you, we do not deny the fact that all sorts of policy measures taken by governments over the years have effects on the economy, either negative or positive. Generally speaking, those second-round effects are difficult to quantify and to put timing on, as a result of which they tend to get taken up. Those effects get included in the budget through just the general process of forecasting economic activity and flowing it through to revenues and expenses. But, for some time now, where there are major changes that will affect resource allocation in the economy, successive governments have estimated a growth dividend.

Senator JOYCE —You would agree that the surpluses that are prescribed or projected in 2013-14 in the scope of things are extremely slim.

Mr Ray —I think the 2012-13 surplus projected is 0.1 per cent of GDP which, as Dr Gruen described it, is small; in 2013-14 it is 0.3 per cent. It is not the first time we have projected those sorts of surpluses, though.

Senator JOYCE —How did you go? Once you had projected them that far out, did you arrive at those surpluses or did you come up with a different number?

Mr Ray —Do you mean when we got to the year?

Senator JOYCE —Yes.

Mr Ray —If you have looked back over the past decade you would have seen that we tended to have outcomes that were larger.

Senator JOYCE —So you would be pretty confident that we are going to hit that billion-dollar surplus?

Mr Ray —No.

Senator JOYCE —You are not confident?

Mr Ray —We are confident that it is the best estimate that we have at the moment.

Senator JOYCE —So what is generally the discrepancy between what is projected three years out and what is actually achieved?

Mr Ray —In terms of what?

Senator JOYCE —We can look back for this government. I remember them talking about a $17.7 billion surplus and we ended up with a $57.1 billion deficit.

Senator CAMERON —Because of the global financial crisis—don’t you remember?

Senator JOYCE —So how are we going in recent times, in the term of this government, in actually hitting the mark?

Senator CAMERON —It is no wonder they put Andrew Robb in.

Mr Ray —I think that is a matter for others to judge. I think Senator Cameron is saying that, where economic conditions change, you should expect that the fiscal outcome would change and, where there has been a policy change, the fiscal outlook will change.

Senator JOYCE —Do you see anything on the horizon on the moment that would change the outgoing numbers?

Mr Ray —As I said to you, these are best estimates at the time.

Senator JOYCE —So these take into account the current turmoil in Europe?

Mr Ray —Yes, they do.

Senator JOYCE —They do—good. So if things carry on the way they are going in Europe at the moment we can still expect to get a billion dollar surplus?

Mr Ray —If things turn out differently from what we are forecasting, then we will likely get a different outcome.

Senator JOYCE —What if things change in the negotiations that apparently the Prime Minister is engaging in with the mining sector? Will that change the surplus?

Senator Sherry —You posed that question. It is a repetition. I did indicate to you that, in terms of policy issues—

Senator JOYCE —Table 6 on page 313 of Budget Paper No.1 shows that policy decisions—

CHAIR —Senator Joyce, the minister has not finished his response.

Senator Sherry —Issues relating to the Prime Minister, or the Treasurer for that matter in the case of economics estimates, we will take on notice. It is not for Mr Ray to respond to a question like that and you know that.

Senator JOYCE —Table 6 on page 313 of Budget Paper No.1 shows that policy decisions since the 2009-10 budget have increased net spending by $5.9 billion. That is the sum of policy decisions for the years 2009-10 through to 2012-13. That figure includes new spending measures, new taxes, saving initiatives. It shows that all the new taxes have been spent, all the saving initiatives have been spent and, on top of that, an additional $5.9 billion has been spent for good measure. Policy decisions have not contributed in net terms to a single cent to reduce the deficit. Would you agree with that statement?

Mr Ray —I would prefer to answer it by saying that the reconciliation table on page 313, which is table 6 that you are looking at, gives an incomplete picture because, at the time of the 2009-10 budget, there was not the last forward year, which is 2013-14. That is one difference. Secondly, the numbers that are published in that reconciliation table include spending which would already have been allowed for in the contingency reserve.

Senator JOYCE —Spending which would already have been allowed for in the contingency reserve?

Mr Ray —Such as overseas aid and drought relief. If you look at page 3-7, table 3—I am not quite sure where the title came from—that shows the net budget impact in cash terms of policy decisions taken since MYEFO. Across the five years 2009-10 to 2013-14, the net impact is a save of $544 million. I do not have MYEFO with me—someone else might—but there is a similar table that is published in the Mid-Year Economic and Fiscal Outlook which, I think, again showed that, once you adjust for the contingency reserve offsets to policy decisions, the policy decisions were a net save.

Senator Sherry —I am more than happy for Mr Ray and you, Senator Joyce, to continue, but I have to point out that the issues you are currently discussing—indeed these very tables—were discussed in finance in great depth.

Senator JOYCE —Mr Ray, do you see the position being more a result of good luck than of good management?

Mr Ray —I think that is question of judgment. But, if you are asking me: ‘Has the government delivered on the fiscal strategy that it set out in the Updated Economic and Fiscal Outlook in February 2009, repeated in the budget, the MYEFO and in this budget?’, I think I can say that there was quite a strong case made in the budget papers to show that it has.

Senator JOYCE —Has Australia ever had a bigger deficit than it had in 2009-10?

—As a proportion of GDP?

Senator JOYCE —As a raw number.

Senator CAMERON —Senator Joyce, no wonder you got the flick.

Senator JOYCE —We will go to both then. Mr Ray, tell me if we have ever had it bigger—in a raw number—and tell me the previous time that we had it that big as a proportion of GDP.

Mr Ray —I think the short answer to that question is: I suspect that in nominal dollar terms it is the largest deficit. In terms of a proportion of GDP, the problem we have is that we do not have underlying cash balance data that predate 1970-71. So I do not know what it was. During the Second World War, for example—

—Is there a bigger one back to 1971?

—I think not, but I would need to adjust it for Future Fund earnings and I have not done that calculation. But I think not. It would be a close-run thing to cite earlier ones.

—Do you want to inform Senator Cameron and me about when you thought you might have had a bigger deficit, in percentage terms, than what you had this year?

—As I said, I am not quite sure, but potentially it was during the Second World War.

Senator CAMERON —Another crisis.

—Almost as big a crisis as Kevin Rudd was the Second World War. I have to admit that.

Senator CAMERON —Or Barnaby Joyce as finance spokesman.

CHAIR —Senator Joyce, do you have another question?

Senator JOYCE —I do. I have a heap.

Senator CAMERON —Tell Andrew Robb that a lot of them have been asked—

—Chair, do you want to control your colleague?

CHAIR —Yes, well. He is silent now, so would you like to go on with your question?

—In 2010-11, the estimate is a $41 billion deficit. Given that the Reserve Bank has recently been increasing rates to ward off inflation, is this prudent?

Mr Ray —I think the answer to that question is that in the first place the contribution of fiscal policy to growth in 2010-11 is negative; secondly, the fiscal consolidation from the peak deficit and this cycle, that is in the budget, is the largest fiscal consolidation on record. It then becomes a matter of judgement—should it be slightly larger or slightly smaller. That is really a policy question that you would need to ask others about. But it is the sharpest consolidation across a four-year period since 1970-71.

Senator JOYCE —Seeing as it is the largest deficit in both raw numbers and percentage terms since 1971, if not since the Second World War, what is our gross interest expense at the end of 2012-13?

Mr Ray —The answer to that question is in the budget papers.

Senator JOYCE —I know.

Mr Ray —Gross interest on all financing costs is $13.8 billion.

Senator JOYCE —On a $222 billion gross debt?

Mr Ray —I think it is better to look at it as a proportion of the economy, so I suppose it is about one per cent.

Senator JOYCE —I am trying to work out the cost of funds.

Mr Ray —Yes, $232 billion

Senator JOYCE —And you have $13 billion in interest, so you are getting your money at about 5½ per cent, is it? That is not meant to be a smart calculation—

Mr Ray —No; I can help you here. In terms of new issuance, the budget assumption is for a cost of funds of about 5½ per cent. That is the weighted average cost. I think Senator Bushby and I have discussed this several times.

Senator JOYCE —Do you believe that is what we are actually going to be paying for money at that point in time, considering what is going on around the world?

Mr Ray —Again, as we have discussed on many occasions, we use an assumption of our interest rates in the budget rather than market rates, because we do not think we can second-guess the market.

Senator JOYCE —So you take the interest rates from now to work out what you are going to pay as a cost for funds in two years time?

Mr Ray —For the new issuance—for existing stock we know what the cost of funds is as we have already issued it—we take the yield curve just before the budget, we look at what that implies given issuance strategy for the weighted average cost of funds at that time, and then we apply that across the forward estimates. That is not an unreasonable thing to do because at that time, particularly when you are talking about longer rates, the market will have taken into account in its assessments its perceptions of forecast expectations of future developments across that period, and they will be built into the yield curve.

Senator JOYCE —Do we extrapolate the yield curve out, or do we rule it off and take it at that spot.

Mr Ray —We take what the yield curve is at that time, and we use that as a technical assumption across the budget.

Senator JOYCE —But it is not being outrageous to say that the trend in the yield curve and the cost of funds is up.

Mr Ray —I do not think that is borne out by the evidence at the moment. The yield curve moves around, but the weighted average cost of funds taken out of the yield curve at MYEFO was about 5½ per cent. It turns out that by the time we got to budget and we did the same calculations it was about 5½ per cent. Since that assumption was struck, it turns out the yield curve has actually moved in.

Senator JOYCE —In the underlying cash balance, can you please explain the line ‘Add contingency reserve offsets to policy decisions.’

Mr Ray —Yes. Governments over many years have included in their contingency reserves allowances for various things. The two big ones in this context are the aid program and exceptional circumstances relief for drought. When the government takes decision to spend aid money, money is taken out of the contingency reserve, so the impact on the underlying cash balance of that decision is zero. That line is where the funds were provided for in the contingency reserve and the government has subsequently taken a decision to spend it. That is the offset. The net impact of those decisions on the underlying cash balance is zero.

Senator EGGLESTON —I would like to move on to a different subject, which is developing and monitoring programs. The fiscal group has responsibility within Treasury for policy development in education, and its mission statement is ‘to ensure government spending arrangements are effective’. First of all, I would be grateful if you could explain the department’s role in relation to the Building the Education Revolution, a program that had a $1.7 billion blow-out, and its effectiveness has been questioned around the country. What was your role in developing that program?

Mr Ray —We provided advice to the Treasurer during the course of that policy’s development.

Senator EGGLESTON —How long was the Treasury given to analyse the policy and provide advice. How long did you have to do this?

Mr Ray —The policy was announced in the first week of February 2009. The policy development work around that package commenced in 2008, but whether that particular component of that package—I would need to take it on notice.

Senator EGGLESTON —What was the department’s understanding of how the policy had been costed? How were costs worked out? Was there an average? Did you think there might be a mean figure that could be applied for most of these buildings and so on?

Mr Ray —Unless my colleagues have something to add, that was really a matter for Finance and the education department.

Senator EGGLESTON —Was the department aware of the need for the extra $1.7 billion that was subsequently required.

Mr Ray —When, Senator?

Senator EGGLESTON —A question of timing? Were you monitoring the expenditure?

Mr Ray —We do not monitor expenditure. We became aware at some point that there would be a need. There were further processes involving cabinet around that, and a package was announced where changes were made to some elements of the UEFO package that offset the need to vary the estimates for Building the Education Revolution. In the process of the development of that package, you could expect that we provided advice.

Senator EGGLESTON —I would expect that. I am trying to tie it down to a point where you might have become aware that there would be a need for extra funding presumably prior to you working out some sort of submission to present to cabinet. Is it possible for you to give some sort of indication of when it was you first became aware that there was a problem that needed to be addressed.

Mr Ray —I do not want to mislead you. I do not know that we did make a submission to cabinet.

Senator EGGLESTON —You did not say that; I said that, I agree. I was trying to be helpful!

Mr Ray —I can take it on notice and see if we can provide any particular dates. I think the general answer is that quite clearly you would expect, given that we are likely to provide advice to the Treasurer ahead of cabinet discussions, that at some point we became aware.

Senator EGGLESTON —We are interested in what some point is. If you could assist the committee with an answer on notice, that would be very helpful.

Mr Ray —I know you are interested in what that some point is and I will take it on notice.

Senator EGGLESTON —Obviously the department’s advice was sought about the need for additional funding and I presume the department’s advice was that additional funding should be provided for this program. Or was that not it?

Mr Ray —That is going to what our advice was. I am happy to take it on notice but, as you know, it would be very unusual for it to be provided.

Senator EGGLESTON —We would be interested to know how you felt the program was going.

Senator Sherry —I love the way you say you would just be interested to know. Mr Ray has made the position clear. It is advice to the minister.

Senator BUSHBY —You could provide the answer in accordance with the orders of the Senate.

Mr Ray —I said I am happy to take the question on notice.

Senator Sherry —I am more than happy for the question to be taken on notice.

Senator EGGLESTON —All right, we will have that question on notice. We move on to stage 2 of the program where additional funding has been provided. What was the department’s ongoing role in that phase 2 stage? How did the department monitor the program if at all?

Mr Ray —As I said earlier, we do not monitor programs.

Senator EGGLESTON —But surely if there had been a failure in stage 1 of the program and additional money was required, you might have been interested to know how stage 2 was progressing, if we can call it that, and whether or not you might have had to provide further additional funding for example.

Mr Ray —I do not want to provide comments but I do not want to accept that there was a failure in what you call stage 1 of the program just because additional funding was needed. It is not unusual for estimates to be varied for programs.

Senator EGGLESTON —I suppose that is the case but $1.7 billion is quite a lot of money to suddenly find you need to keep the program growing. I would have thought you would notice if you were short of $1.7 billion?

Senator Sherry —Mr Ray has clearly indicated the responsible department is DEEWR and the Department of Finance and Deregulation certainly would have had some oversight view but not Treasury. Treasury would have been asked their view, as Mr Ray has indicated, by the minister and that would have been advice to the minister. Beyond that, Treasury do not oversight program by program expenditure.

Senator EGGLESTON —I understand that. I suppose where there is a need for an extra $1.7 billion dollars, as I have said three times before, that would have attracted a certain amount of interest in Treasury.

Senator Sherry —It was indicated there was clearly interest. When Treasury asks for a brief from any department about anything I am sure they get a very quick response. But it is not the role of Treasury to oversight specific expenditures in other departments. Finance does have a role.

Senator EGGLESTON —Finance does have a role, I agree—very much—but I would have thought that , around the coffee table at morning tea, someone might have said that $1.7 billion—

Senator Sherry —Again, you are—very courteously, I have to say—attempting to find some other mechanism by which Treasury oversight expenditure. As sure and confident as I am that they do discuss issues from time to time, over morning and afternoon tea, and over lunch and dinner and everything else, it is not part of the formal process responsibility oversight of Treasury.

Senator EGGLESTON —We will accept what you are saying then, Minister, even though they might have discussed this at morning tea—

Senator Sherry —I am sure they discussed the relevance of questions at estimates and who is doing what. I am sure that is discussed over morning and afternoon tea.

Senator EGGLESTON —they are not prepared to perhaps assist the committee in its assessment of this program and what went wrong. But I might just ask: does the department think that Building the Education Revolution was value for money, as it turned out, in the way it was administered and good policy? Just say ‘value for money’. I know that policy is a difficult area for you.

Mr Ray —Senator, it is not our role to make such judgments. It would be reasonable for you to ask us whether we thought that the fiscal stimulus package was effective in a macroeconomic sense, and I think you have already had a discussion of that with our macroeconomic group colleagues. It is not our role to assess whether an individual program is value for money. That is a matter for others, including the Auditor-General.

0Senator Joyce interjecting—I am aware of press reports to that effect.

Senator EGGLESTON —Well, I do not know. It was a $16.2 billion program, I believe, and $1.7 billion is quite a bit extra to require, so we find it a little bit surprising that you do not have an opinion about the effectiveness of the way the program was administered.

Senator Sherry —Senator, this is your second or third go at this question. The matter has been answered by Mr Ray previously and in another part of Economics, in macro. I am impressed by your ongoing courtesy, but no.

Senator EGGLESTON —Thank you so much, Minister. Let’s move on to another program then: the Home Insulation Program. Again, would you be good enough to explain the department’s role in relation to the Home Insulation Program?

Mr Ray —Senator, you can expect that we provided policy advice on the program.

Senator EGGLESTON —You did provide policy advice. That is very good. We know then that you provided policy. I wonder how long was given to you to analyse the policy and provide advice.

Mr Ray —I think the answer is fairly similar to the last program, because my recollection is—I may be getting the program wrong but someone will help me—that that program was part of the 3 February 2009 package. The policy development around that package we were definitely providing advice during that process.

Senator EGGLESTON —I suppose the real interest in this particular program has been the way it went wrong, isn’t it? It turned out to be a bit of a disaster, in fact, with concerns about the destruction of property, injury and loss of life, plus doubts that it was an effective form of stimulus. Will the Treasury be undertaking an analysis of whether or not there should have been more awareness of the problems and safety precautions taken?

Mr Ray —Senator, again I think that is a question for others. It is something Treasury obviously was very involved in developing policy—

Senator Sherry —It is part of the macro stimulus package, and Mr Ray has gone to that. The responsible department and, to some extent, Finance, are the relevant areas—but not the fiscal group of Treasury, Senator.

Senator EGGLESTON —Surely, though, there must have been some element of due diligence in recommending any program?

Senator Sherry —It is not an issue for the fiscal group of Treasury.

Mr Ray —Senator, you are also going to the nature of our policy advice.

Senator EGGLESTON —And of course it does to some degree but, in any policy advice, surely you would have some sort of due diligence factor on which you would assess possible risks and would want certain standards to be maintained. It seems that in this program perhaps those things did not occur.

Mr Ray —When we are providing policy advice we bring our comparative advantage to the table and there are other agencies which bring their comparative advantage to the table.

Senator EGGLESTON —Finally, I want to ask you some questions about funds that were allocated to the Department of Climate Change and Energy Efficiency in the budget. In the portfolio budget statement for that department, $132 million was allocated to a program that no longer exists—the Low Emissions Assistance for Renters program. How did that occur? You managed to allocate $132 million—quite a large sum of money in most people’s terms—to a program that no longer existed. I think, in some ways, it is a bit of an achievement to do that, but other people may regard it as gross negligence.

Mr Ray —My understanding is that a corrigendum has been issued correcting that. It would be a question more for the department of climate change; it is their portfolio budget statement, not ours.

Senator EGGLESTON —I agree that a correction was issued on the website, stating that the $132 million was actually for a program called Green Start, a program to succeed or follow the bungled Green Loans scheme that was to help households reduce their energy and water use. Could you perhaps tell us what the $132 million actually went towards. What is that $132 million funding?

Mr Ray —Again, this is really a question for the department of climate change. It is not our program; it is their program.

Senator EGGLESTON —I agree it is not your program; but you are the funders—

Senator Sherry —Senator, if we were to accept questions on details of programs, the fiscal group of Treasury would be here all week and all night. We would have no other estimates hearings if we accepted—

Senator BUSHBY —These questions are to ensure that spending arrangements are effective. That is what these questions are about: the effectiveness of the spending arrangements.

Senator Sherry —That was not the question that was posed. The discussion and the questions remind me of, at least, some elements of the Finance estimates where Finance is expected to provide—and, to some extent, they can provide detailed knowledge of some programs in other departments because scrutiny is part of their overall responsibilities—but fiscal group in Treasury—

Senator BUSHBY —Has a specific responsibility—

Senator Sherry —I am sure if—

Senator BUSHBY —Do they ring you or read the portfolio budget statements?

Senator Sherry —I am sure if there is an area where they indicate they have done particular work, and that may be the case from time to time, but generally it is not going to be possible to provide that because it is not its responsibility.

Senator BUSHBY —Are you saying they do not even read the portfolio budget statements—

Senator Sherry —I did not say that.

Senator BUSHBY —relating to what is in the portfolio budget statement. They are responsible for ensuring that the expenditure is appropriately and efficiently outlaid.

Senator Sherry —I did not say—

Senator EGGLESTON —What Senator Bushby is saying is really at core and quite correct. What seems to be implied by this error is that, if a department puts in an application for funding for so-called program X and it happens to be for $132 million, it is just ticked off without any assessment of what the program is, what it is designed to achieve and whether the expenditure is justified. Surely this is a matter of grave concern. It ought to be a matter that every citizen of this country should be worried about. Here we have Treasury just flicking money off to programs they do not know anything about.

Senator Sherry —That is not right.

Senator EGGLESTON —That seems to be the impression.

CHAIR —Can you allow Mr Ray to respond.

Senator EGGLESTON —I may be stating it in fairlygross terms.

Senator Sherry —Your courtesy is lapsing, and you are being somewhat argumentative and making an incorrect claim about the role of the fiscal group.

Senator EGGLESTON —Nevertheless, the fact remains that that is essentially true.

Senator BUSHBY —It is their mission statement.

CHAIR —Senator Bushby, you have made your point. Mr Ray.

Mr Ray —Your questions are proceeding on the basis of a misperception. The question of the entry of an estimate by a portfolio is a matter between that portfolio and the Department of Finance, not the Department of the Treasury. Our role in our mission statement is around providing policy advice, particularly when new policy proposals come before government. I do not think you can leap to the fact that we should have been out there doing something about the fact that there has been an error in a portfolio’s PBS.

Senator EGGLESTON —As I said, I would have thought there was some sort of due diligence requirement on behalf of the people of Australia that you would ensure that the programs you are providing money for actually do exist and that this is justified expenditure.

Mr Ray —We do not actually provide the money; that is the first point. The second thing is—

Senator EGGLESTON —You are the Treasury, as I understand it.

Mr Ray —The program estimates are matters for the relevant portfolio and agency and the Department of Finance, not for the Treasury.

Senator EGGLESTON —Finally, is the Treasury taking any steps to ensure that such errors do not appear in future budget papers? Are there any issues that you are going to look into regarding how your department prepares its statements?

Mr Ray —I will answer that in general terms. Yes, were it possible—presumably it is possible—to produce a complete set of budget papers without a single error in them that would be the ideal outcome. History suggests, though, that that is unfortunately not that likely. I have been around for only 20-odd years. If you look back at budgets over the past 20-odd years there may be one that does not have a single error in any of the documentation, but I would probably be surprised. After the budget every year we have what we call a ‘postmortem’, a detailed review of the whole budget process, which we do with our colleagues, the Department of Finance and the Department of the Prime Minister and Cabinet. We look at all these sorts of issues and see whether changes need to be made to our systems and processes to minimise the chance of a particular type of error recurring. We in the Treasury do not see the portfolio budget statements.

Senator Sherry —I have been here almost as long as Mr Ray. I can recall the first budget of the former government in 1996—that is a long time ago now—when the Department of Finance had to issue a corrigendum with, I think, about 70 or 80 errors. It went to pages of errors. It was somewhat embarrassing for them, but errors do occur from time to time. That is the worst I can ever recall, I have to say.

Senator BUSHBY —That was put together in a very short period of time after a new government was elected.

Senator EGGLESTON —That is right, too—three months, in fact.

Senator Sherry —Notwithstanding that, it was a very, very large set of errors. I am just pointing out that errors do occur from time to time. That is one that I can certainly recall, because it was an embarrassment to the Department of Finance at the time.

Senator EGGLESTON —I am sure it was, Senator Sherry, but the fact is that an error occurred, and the fact that postmortem meetings are held to look into the reasons for these kinds of failures occurring is encouraging.

Senator Sherry —Did you say ‘postmortem’?

CHAIR —That is the term Mr Ray used.

Senator Sherry —I know you have a medical background!

Senator EGGLESTON —But to the average Australian $132 million is an awful lot of money, and I think the Australian people would expect there to be a much more rigorous assessment of expenditure and of the allocation of expenditure than appears to have occurred in this case.

Senator Sherry —To the extent it is an important issue, and you are raising it, it should be raised with the appropriate department.

Senator EGGLESTON —I would have thought that Treasury was one of the appropriate departments, but I will leave the matter there.

Senator CAMERON —Senator Joyce raised the issue of growth dividend from the RSPT. Was there a growth dividend attached to forecasted tax collections related to the GST reform?

Mr Ray —When I was answering Senator Joyce’s questions I referred to two previous occasions. One was A New Tax System package, which included the goods and services tax. The other package was the so-called Ralph package around business tax. On both occasions a growth dividend was included.

Senator BUSHBY —Looking at budget paper No. 1, page 9-23, note 15: can you explain what assets make up the ‘Others’ row in the presentation of the Commonwealth’s holding of investments, loans and placements? I am interested in you providing a precise disaggregation of this ‘other’ row into all of its constituent elements such that there is no residual ‘other’ row. We are talking about $60-plus million.

Mr Ray —I am happy to take it on notice to see what we can provide. It is mainly Future Fund holdings. We do not have a detailed disaggregation.

Senator BUSHBY —Anything else you are aware of, that you can give me today?

Mr Ray —The national building funds are in that line as well.

Senator BUSHBY —We are talking about $60-plus million. It would be worth having another line that did not say ‘Other’ when you are looking at this—an awful lot of money that belongs to taxpayers of Australia. A little bit more transparency would be good.

Mr Ray —We can go back and have a look but I suspect it has been this way for some time.

Senator Sherry —We will take it on notice. I remember having a significant fight about the disaggregation from revenue for that surcharge measure. It took me four or five years to finally get it disaggregated, but we finally got it disaggregated.

Senator BUSHBY —Minister, I have enjoyed your reminiscing over the last two days of the year-and-a-half, I think you said, that you have spent in estimates. It is good to hear that it continues today; telling us all about your memories of past times.

Senator Sherry —It sounds like a reasonable suggestion; I will put it on notice. There has been disaggregation before, following the questioning of non-government senators. 

Senator BUSHBY —On the previous page, 9-22, note 14 indicates that there is about $13 billion in student loans on the asset side of the Commonwealth’s balance sheet. How are these assets valued on the Commonwealth’s balance sheet?

Mr Ray —This is the wrong portfolio. They are actually valued by the education department, not by us. They are valued at what is called ‘fair value’. So they take into account things like—it is probably not that relevant this year but it will become more relevant in time—expected death rates of people who may have a HELP debt; they also use actuarial valuations. I do know it is called ‘fair value’ and it is done by the department of education.

Senator BUSHBY —‘Fair value’ is a technical term.

Mr Ray —Yes.

Senator BUSHBY —Is it a form of written down value to reflect the expected value of the repayments in the future?

Mr Ray —It does not include a provision for doubtful debts, that is in the other line. But it does include an estimate of mortality.

Senator BUSHBY —Do they consider the fact that generally student loans are only lifted at the inflation rate rather than at a commercial interest rate?

Mr Ray —Yes, they do.

Senator BUSHBY —On the assets side of the general government balance sheet, how much constitutes cash or the non-equity investments of the Future Fund, the Building Australia Fund, the Education Investment Fund or the Health Investment Fund?

Mr Ray —So the cash holdings of all those funds?

Senator BUSHBY —How much constitutes cash or the non-equity investments of any of those funds?

Mr Ray —I think it is best if we take that question on notice because the answer is quite detailed.

Senator Sherry —I think those details were provided at finance.

Senator BUSHBY —Okay, then it would probably be very easy for you to hunt them out and provide them to me. What is the justification for using these cash holdings of the Future Fund and other funds to offset gross debt?

Mr Ray —It is the accounting standard. I will go back a question. I can tell you the Future Fund’s cash holdings at 31 March were $10.5 billion. Its debt securities were $14 billion.

Senator JOYCE —So how much is in other than that? How much of the $62,925 million, or $62 billion, is from the Future Fund?

Mr Ray —I think it is best if I take that question on notice, to make sure that we—

Senator JOYCE —It is definitely at 10.5 but there is also the other amount as well.

Mr Ray —Yes. Senator Bushby asked me what is the justification. It is consistent with the accounting standard.

Senator BUSHBY —I understand that the Building Australia Fund, for example, holds considerable cash due to imminent drawdowns for the government. But since these current liabilities are not recognised on the balance sheet why do we use them to offset our gross debt?

Mr Ray —Again, as I said, it is consistent with the accounting standard.

Senator JOYCE —Which accounting standard?

Mr Ray —I suspect it is ABS GFS.

Senator BUSHBY —And that treatment under than standard has been consistent for a number of years as to how you would show those relevant entries? Has anything changed in the last two or three years?

Mr Ray —It is safest if I take that question on notice.

Senator JOYCE —Can you just tell me though which accounting standard?

Senator BUSHBY —You have got the accountant very excited by mentioning accounting standards!

Mr Ray —Generally speaking, the budget is prepared using two accounting standards, AAS and ABS GFS, and there is a technical note towards the end of statement 9.

Senator JOYCE —What was the other ABS one? It would have a number, wouldn’t it?

Mr Ray —ABS GFS and AAS.

Senator JOYCE —Number what?

Mr Ray —It is 1049.

Senator BUSHBY —How does the government define spending for the purposes of measuring the two per cent increased cap on real spending? That is, which expenditure line is used for this purpose?

Mr Ray —Payments for spending.

Senator BUSHBY —So that is it—payments for spending?

Mr Ray —It is cash payments.

Senator BUSHBY —What deflator does it use to calculate the real increase in spending?

Mr Ray —The CPI.

Senator BUSHBY —Looking at the budget, about $976 million of funding under the nation building program has been brought forward to this financial year. What was the rationale for bringing forward these payments?

Mr Ray —That is really a question for the department of infrastructure.

Senator BUSHBY —That is fine. I will move on. Did you receive any requests from states to bring forward these payments? Are you aware of whether the government did that through you?

Mr Ray —Again, I think the question of the programming of those payments is a matter for the department of infrastructure.

Senator BUSHBY —Are you aware of the answer to that question?

Mr Ray —No. I am not aware of the answer to the question.

Senator BUSHBY —Are you aware of the answer to the previous question?

Mr Ray —No. I am not aware of the answer to the question.

Senator BUSHBY —You are not aware of what the rationale was for bringing forward the payments?

Mr Ray —I think it is best to ask infrastructure.

Senator BUSHBY —Are you aware of the reason?

Mr Ray —No.

Senator BUSHBY —Are you aware of the reason, Minister?

Senator Sherry —No.

Senator BUSHBY —Is it  normal practice for funding to be delivered to the states so far in advance of their expenditure needs?

Mr Ray —Again, you are going beyond our expertise, but the practice of when payments go the states varies from program to program, project to project. They tend to be set out in individual agreements with the states on a project by project basis. Some have milestones; some have different forms. It is also not unusual for the timing of those payments to be varied during the life of the program.

Senator BUSHBY —Would the timing of those payments in those not unusual circumstances be varied in circumstances where the states do not actually need the money at that point?

Mr Ray —I think it is best to say that payments to states have been brought  forward from time to time over the years. It is not an unusual thing to happen. Whether the states can use the money is a different question.

Senator BUSHBY —In terms of due diligence and the approach that you have to making payments to states under agreements that you have with them, do they have to show they need that money to pay for the program they are delivering? Are there any criteria that need to be met?

Mr Ray —I will start and Ms Vroombout can help me if I get into trouble. The individual agreements have different forms of scheduling the payments. Sometimes they are subject to milestones; sometimes they are paid on particular predetermined dates. In terms of our role in making payment to the states, we would act on the advice of the relevant agency that the agreement had been satisfied. Obviously if the agreement is that the payment goes on the first payment day after 31 March, it is fairly easy to see that has been satisfied. If it is a payment that is subject to certain milestones then it is a matter for the relevant agency to instruct us to make the payment.

Senator BUSHBY —If the infrastructure department comes to you and says, ‘We would like the billion dollars we were supposed to get next year,’ you would say, ‘Not a problem, if that’s what you need, we’ll give it to you.’ You would not go through any due diligence check or ask any questions?

Mr Ray —No, it would not work like that. It would need to be consistent with the agreement with the state.

Ms Vroombout —In  making payments we require certifications from portfolio agencies that the payment is consistent with the agreement. Each month when we make a payment we receive certifications from portfolio agencies that the payments are authorised by agreements with the states.

Senator BUSHBY —And that is all it says? They say to you, ‘This is authorised by the state.’ You do not need to see the agreement. There is no sort of monetary limits. We are talking here about $1 billion. You do not have any thresholds at which you would take a closer look rather than just accept a single page certification that this is in accordance with what we agreed with the states.

Ms Vroombout —We do do some quality assurance of payments to the states and check against agreements that we hold.

Senator BUSHBY —In this case, where the budget shows almost one billion has been brought forward, you have not employed that quality assurance process to ensure that this request to bring forward a billion dollars is in accordance with the states?

Mr Ray —We need to be careful, but we are happy to see if we can add anything. We do not think the payments have been made yet.

Senator BUSHBY —I do not think they have either. There was a note in the budget that they would be. When the budget measures are put together, noting that this billion dollars has been brought forward, or a large amount of money has been brought forward from when it was anticipated being spent to an earlier year, is that something that the fiscal division would have an interest in?

Mr Ray —To the extent that we have an interest in putting the budget together, of course we have an interest.

Senator BUSHBY —Presumably somebody has come to you and the department of infrastructure saying they want to spend the $976 million this year rather than next year?

Mr Ray —There are movements of funds backwards and forwards across the budget across a whole range of portfolios throughout the budget process.

Senator BUSHBY —I acknowledge that. Presumably you do not just act as a bookkeeper; you actually take a little bit more of an interest in it and if somebody is moving a billion dollars forward, you would actually take a bit of a look at it—

Senator Sherry —You used the word ‘interest’ in your question. I think you could take that a couple of ways. I think it is fair to say Treasury has an interest in everything—

Senator BUSHBY —Mr Ray has indicated he is not aware of the rationale for it being brought forward.

Senator Sherry —Let me just finish. Treasury has an interest in everything—a general interest in anything and a specific interest from time to time. But direct interest, I think, would be a different thing from a general interest—

Senator BUSHBY —But this is the Fiscal Group and their remit is to oversee the spending of the money that the government spends. Here we have a billion that was set to be spent in one year and now it is being brought forward to be spent one year earlier.

Senator Sherry —I think this goes back to our earlier conversation about the role of the Fiscal Group. Where there are officers that can help you in the general, if they are not aware of the specifics, they will certainly try to help you, but there is a limitation on the level of detail that Fiscal can go to in some of the circumstances you are raising.

Senator BUSHBY —Mr Ray has indicated that he is not aware of the rationale for bringing it forward. Is anybody in the room aware of the rationale for bringing it forward?

Mr Ray —If you look at page 272 of Budget Paper No. 2, $44 million has been brought forward for the Douglas Arterial Road. It says:

The Government will bring forward $44.0 million to 2009-10 … to accelerate commencement of work on the project.

So, I assume that is the reason. For the Holbrook bypass, it says:

The Government will bring forward a payment of $201.5 million to 2009-10 …in order to facilitate early commencement of the project.

For the Ipswich Motorway, it says:

The Government will bring forward $500.0 million to 2009-10 … to reflect the progress made on the project to date.

For the Superway and Northern Expressway, it says the government will bring forward funds ‘to facilitate the early commencement of construction as part of the South Road package of works’. There is also $6 million being brought forward for the completion of a project. So, if you go through the budget papers, in each case the reason for the bring-forward is set out.

Senator BUSHBY —So we have worked out the rationale is to bring forward, in most cases, the early commencement of these projects.

Mr Ray —Or because of early completion, I think. Again, it is going beyond our expertise. The reasons are set out for each of them.

Senator BUSHBY —Are you aware of whether the states requested that these be brought forward so they could start the early commencement?

Mr Ray —You have asked that before, and I am not aware of whether the states requested it.

Senator BUSHBY —The budget also brings forward $500 million in local government funding. Are you aware of what the rationale was for bringing forward over half a billion dollars in local government funding?

Mr Ray —Not off the top of my head.

Senator BUSHBY —These payments were brought forward last year as a stimulus measure. Now that we are moving towards trend growth, why are they being brought forward now.16:44:46

Mr Ray —It is not our portfolio, but I can read to you from the budget papers. It says: ‘to ensure that councils have immediate use of these funds. This will ensure local government is able to take maximum advantage of the global recovery.’ And ‘improves their financial capacity and assists them in planning their works programs.’ Again, these are questions that you should ask the Department of Infrastructure, Transport, Regional Development and Local Government.

Senator BUSHBY —Okay, so it is giving them funds earlier. That is a desirable thing at any time. It is interesting that there is no sort of steel to that rationale. It is more just a group of words put together that really does not say very much at all. Giving them the money earlier; why not bring forward—

Senator Sherry —As to the detail, further explanation and exploration, it is the department, Senator.

Senator BUSHBY —Okay. You are not aware whether the local government has requested that money to be brought forward early?

Mr Ray —No, Senator, but local governments generally request money.

Senator BUSHBY —I am sure they request money. An Australian National Audit Office report on Roads to Recovery expressed concerns about the cost of the government making advance payments to local government. Did you look at that report before bringing forward this spending?

Mr Ray —A, we did not bring it forward. It was a decision of the government—

Senator BUSHBY —But you provide advice to government. In the process of providing advice, did you consider—I am not asking what the advice was—the ANAO’s report on Roads to Recovery?

Mr Ray —Generally movements of funds are principally matters for portfolio agencies and the Department of Finance and Deregulation.

Senator BUSHBY —So once again you just accept what you are told.

Mr Ray —I would not go that far, but there is a division of labour between us and the Department of Finance.

Senator BUSHBY —What are the costs to the Commonwealth of the forgone interest of this $1½ billion being brought forward a year earlier? In terms of interest.

Mr Ray —We do not estimate those sorts of things.

Senator BUSHBY —But there is a cost. By spending that $1½ billion a year earlier than otherwise planned, in a debt financing scenario, that means that we have to be able to have a million and a half dollars available to spend a year earlier. Presumably that would come with an interest cost.

Mr Ray —The way that you have framed the question I do not disagree with the concept, but as a general rule we do not separate it all out. It will depend on when in the year. As you know, our financing needs are not just a question of the aggregate, end-of-year budget balance position—

Senator BUSHBY —You have got bonds that are maturing and—

Mr Ray —Yes, and there are the cash flows through the year, and so the question is quite a complex one.

Senator BUSHBY —But on an average basis you could actually look at it and say, ‘We are going to have to increase our financial requirement to cover that this year, and therefore there is an interest cost.’

Senator Sherry —But also presumably, it depends where it is—because it is brought forward from one financial year to another, it does not mean that the actual payment is brought forward for a full year.

Senator BUSHBY —That is right. It is not necessarily 1½ billion times your average bond rate. I acknowledge that. But there is, nonetheless, a cost in terms of interest terms of interest by spending that money earlier than if you had not—

Mr Ray —I agree with that in concept. On the other hand, other spending has been deferred in the budget process. Equally, on the same analysis there would be an interest saving from that.

Senator BUSHBY —What other spending has been deferred? It is a good point. In the context of the reason why I am asking these questions, I am very interested to know whether there has been major spending that was planned and has been pushed out into the coming years.

Mr Ray —I suspect the numbers of movements of funds are in the hundreds. We can take it on notice to find out, but there is a range of spending that has been deferred, including in the capital program for the Department of Defence—

Senator BUSHBY —Deferred with a particular date identified, or deferred indefinitely.

Mr Ray —Deferred with dates identified, including in the water program. There are a number of them, and some are included in the budget.

Senator BUSHBY —Could you give me a complete list of spending that has been deferred together with the amounts and the time lines.

Mr Ray —I will certainly take that on notice. Again, it is one that I am going to send to the Department of Finance.

Senator JOYCE —Without being too pedantic, I want to jump back into your accounting treatment of net debt. What is the current outstanding public service liability?

Mr Ray —For?

Senator JOYCE —It is about $125 billion or something, isn’t it?

Mr Ray —The superannuation liability?

Senator JOYCE —How much are we actually—

Mr Ray —It is disclosed in the—

Senator JOYCE —Maybe it is $130 billion now.

Mr Ray —The actual number is probably not in here.

Senator JOYCE —I am trying to do this from memory. It was $125 billion. It may be up to $132 billion or something.

Mr Ray —This is an estimate, not an actual. The estimate for the end of 2009-10 is $123 billion, in round numbers.

Senator JOYCE —How much have we got in the Future Fund?

Mr Ray —I do know that.

Senator JOYCE —Is it $65 billion or something like that?

Mr Ray —Ms Harris will get it for you.

Ms Harris —As at 30 March 2010 the Future Fund had total assets of $67.6 billion.

Senator JOYCE —What is our liability?

Mr Ray —It is $123 billion. That is an estimate.

Senator JOYCE —Where is that $56 billion liability booked? Seeing that we are putting the assets—

Mr Ray —We book it in net financial worth. I think we have discussed this before. It is precisely for this reason that the government in its medium-term fiscal strategy looks to net financial worth not to net debt.

Senator JOYCE —What is the net financial worth of the government’s position in 2012-13?

Mr Ray —In 2012-13 it is negative 11.1 per cent of GDP.

Senator JOYCE —What is that as a number?

Mr Ray —It is $173.8 billion.

Senator JOYCE —Dollars out the back door.

Mr Ray —I do not want to say ‘out of the back door’, but negative.

Senator JOYCE —Negative 11 per cent.

Mr Ray —It has been negative for as long as the series has been kept.

Senator Sherry —Including under the previous government, obviously.

Senator JOYCE —How do you define ‘booking the asset’ in your net debt position when you are not booking the liability in the same process?

Mr Ray —We do not book all of the assets for the Future Fund in net debt. Some of the assets of the Future Fund, the equity fundings and the Telstra holding, are not booked in net debt, and their other alternative assets. Sorry, I take that back. I think alternative assets may be in net debt.

Senator JOYCE —How much is in alternative assets?

Mr Ray —I think $7 billion.

Senator JOYCE —But they are not in net debt?

Mr Ray —I have to take that on notice because again this is beyond my account expertise. Someone will help me. I have a feeling it might be in net debt but I do not know. But the equity holdings and the Telstra holdings are not in net debt. They are in net financial worth.

Senator JOYCE —So where is the accounting standard that says specifically that you can take up an asset but you do not recognise the eminent liability in the same assessment?

Mr Ray —Senator, if you want to have a detailed conversation about accounting standards you would need to talk to the accountants in the Department of Finance rather that to us.

Senator JOYCE —In my perusal of AASB 1049,  I notice that in fact it specifically precludes a corridor approach, so how did you manage to do it?

Senator Sherry —As Mr Ray has already indicated, it is a matter for the Department of Finance.

Senator JOYCE —It calls into question the whole statement of where your net debt is.

Senator Sherry —It is a matter for the Department of Finance, Senator.

Senator JOYCE —In your other building funds, you have booked the asset but you have not booked the fact that we have got the liability out there.

Mr Ray —If the spending occurs in the forward estimates, it has been booked as an expense.

Senator JOYCE —You are saying you have booked it as an expense in your forward estimates but you are booking the asset now against the prospective liability and for an entirely different purpose.

Mr Ray —Everything else being equal, which is always tricky, if we start from a position in which the government is in deficit, there is a corresponding liability, which is the additional debt that has to be erased. It is in the liabilities line.

Senator JOYCE —Basically, to get a full picture and to look at our net debt position now, you have to take into account our future liability position as well for debt in the future.

Mr Ray —I am not quite sure what you mean when you say ‘a full picture.’ I do not think that we or the department of finance or the government would disagree with you that net financial worth is a more complete measure of the strength of a balance sheet than net debt, but in terms of international comparisons net debt tends to be the one that is used because that is the one that is most consistent.

Senator JOYCE —There is a timing issue that comes into play and also the big monster in the room is that the government has underwritten $57 million of state debt but that is not booked in your net debt position, is it?

Mr Ray —No, but it is reported in the statement of risks because it is a contingent liability which is remote.

Senator JOYCE —If you look at the debt of Japan, does Japan disaggregate the government’s debt and the debt of the other related—

Senator Sherry —If Mr Ray does have some knowledge of the Japanese budget and their fiscal groups, accounting standards and reporting then fine. I suspect he does not. We are happy to take that on notice and get some sort of international comparison with perhaps Canada, which has a federal structure, and Germany. I am not sure about Japan but we are happy to take it on notice.

Mr Ray —Just to try and help: if you look at the sorts of indicators that people who look at these things for a living do—that is, people in financial markets, ratings agencies and international organisations—you can look at gross debt to GDP, net debt to GDP, gross interest to GDP, net interest to GDP and tax to GDP, which gives you an indication of future capacity to raise revenue. You can look at various spreads. No single one of these indicators is necessarily the single thing to look at but, if you look at the whole range of those things, Australia’s balance sheet is in pretty good shape.

Senator JOYCE —I don’t just want to know it is AASB 1049 because it just says you will comply with the accountancy standards in general. I want to know exactly what accountancy standards you are applying when you say, ‘I am applying this and I refer to this accounting standard that allows me to book the asset and not book the liability.’

Mr Ray —As a general rule we apply ABS GFS or AABS 1049. Where those two accounting standards vary and the choice that the government has taken about which one to follow is explained in the budget papers. If you want to ask detailed questions about where this treatment is in the accounting standard, it is better if you ask the department of finance.

Senator JOYCE —But it would be fair to say, without being esoteric, that if someone were to look at it they might say, ‘Ah; net debt position means there is a certainty that I will be able to liquidate that asset to pay that debt, because that’s how I got a net debt position.’ But you cannot go out and liquidate someone else’s money, because that money that is sitting in the super fund is not your money. It is the money of the public, it is the money of you people. Unless you want them to pay a debt off with your money, you will not let them do it.

Mr Ray —Net debt is an accounting measure to look at the net debt position of an entity. I agree with you: it is not about whether or not a particular asset is liquid, although in general net debt type assets are more liquid than non-debt type assets such as this building. The issue for lenders, investors, is whether the government has the capacity to meet its obligations and in particular to pay interest at coupon dates. Our gross interest to GDP and our net interest to GDP ratios are very low.

Senator JOYCE —At the moment. How much did you borrow last—

Senator Sherry —Not just at the moment. The forecasts are comparative.

Senator JOYCE —How much gross did we borrow last week?

Mr Ray —It would be—

Senator JOYCE —Well, I know.

Mr Ray —It was about 1.1—

Senator JOYCE —No, it was a little bit more than that.

Mr Ray —It was about $1½ billion.

Senator JOYCE —Last week?

Mr Ray —Yes. The AOFM are coming tomorrow, and they can tell you the precise figure.

Senator JOYCE —It was in excess of $2 billion, I think. If you keep going on like that, I do not care what happens: you are going to have a massive problem.

Senator CAMERON —What a joke. You are just a joke in this. No wonder they gave you the flick. You are an absolute joke on this issue.

CHAIR —Senator Joyce has the call.

Senator CAMERON —Your own colleagues do not trust you on it—

CHAIR —Senator Cameron.

Senator CAMERON —Why can’t you—

Senator JOYCE —What is the gross debt, Senator Cameron?

CHAIR —Senator Joyce, I suggest—

Senator CAMERON —You are a joke on this.

Senator JOYCE —What is the gross debt?

Senator CAMERON —You got the flick.

Senator JOYCE —You are depriving some poor town of a fool.

Senator CAMERON —You got sacked on this, mate, you were so bad.

CHAIR —Senator Joyce, I suggest, if you do not want to elicit comments, you do not make comments and you continue to ask questions.

Senator JOYCE —Well, control him then, Chair; he is sitting next to you. He is in your party.

CHAIR —We are waiting for Mr Ray—

Senator JOYCE —What is the cost of establishing the Independent Hospital Pricing Authority?

CHAIR —Wait a minute. Mr Ray is still answering your last question.

Senator CAMERON —The Libs controlled you; they sacked you!

Senator JOYCE —Didn’t you say he’s the piper who calls the tune? That will make AM. Another one of your classic comments!

Senator CAMERON —The Libs controlled you. They sacked you, mate.

Senator JOYCE —Another one of your classic comments. You are good for us; you are a big asset for us, Senator Cameron! Don’t go anywhere!

Senator Sherry —I notice some of your comments made the news this morning, Senator Joyce. You would not describe them exactly as an asset.

CHAIR —Mr Ray?

Mr Ray —Last week we issued $1.25 billion of nominal bonds, $400 million of notes and $300 million, I think, of indexed bonds—so $1.95 billion. That is what was issued.

Senator JOYCE —That is a lot closer to $2 billion than $1½ billion.

Mr Ray —No, no. I agree. That is fine.

Senator JOYCE —Thank you. What is the cost of establishing the Independent Hospital Pricing Authority under the National Health and Hospitals Network reforms? How many staff will the authority employ?

Mr Ray —Ms Furnell might be able to help you.

Ms Furnell —The Department of Health and Ageing is responsible for the establishment of the independent pricing authority. There are details on the cost in Budget Paper No. 2, on page 233:

The Government will provide $91.8 million over four years to establish an Independent Hospital Pricing Authority …

I do not have any details on staffing. I could pass that question to the Department of Health and Ageing.

Senator JOYCE —Budget Paper No. 1 states that, under the state infrastructure fund:

Resource-rich states will receive relatively more funding, reflecting the greater call on their budgets for investment in infrastructure that supports the ongoing development of the resource industry.

Can you provide any more detail on how the fund will be directed to resource-rich states.

Mr Ray —No, Senator. That is subject to negotiations between the government and the states.

Senator JOYCE —So would a resource rich-state include the whole of the state or are we talking about the regions from where the wealth comes from? For instance, if I was to take wealth out of central Queensland, around Emerald, under this fund could you easily say, ‘You can now apply that money to Brisbane’?

Mr Ray —I think that is a level of detail that has not yet been concluded. There are clearly options. I think the best answer is that those sorts of details just have not been settled.

Senator Sherry —I am just looking at the announcement and the issue you are going to is not included in the announcement. It says, ‘The final details for the infrastructure fund will be negotiated with the states’.

Senator JOYCE —Okay, I will be more precise. There is nothing to say that the money that comes from the regions will go back to the regions, is there?

Mr Ray —Leave aside the question about where the money comes from; the money actually comes from shareholders, many of whom are not even in the country. I think it might depend on need, in part.

Senator JOYCE —Where does it say that?

Mr Ray —It doesn’t. But if you were a state government you might be thinking about where is the greatest need—

Senator JOYCE —You might or you will?

Mr Ray —I have never worked for a state government, so I should not guess what they may or may not do. One of the things that the Commonwealth Grants Commission does is to assess needs and in its latest review of needs, one of the things that were changed was its treatment of so-called capital. One of the factors for resource-rich states that also have relatively rapidly growing populations is that their relative need for infrastructure is greater than some of the other jurisdictions. This infrastructure fund supports that.

Senator JOYCE —You said the RSPT is paid by shareholders.

Mr Ray —Yes.

Senator JOYCE —What does that mean for the share prices?

Mr Ray —You discussed this with others.

Senator Sherry —Mr Gallagher outlined that yesterday. I do not know whether you were here or not but he outlined it in some detail. I do not believe we should be going over questions that were answered in detail yesterday.

Senator JOYCE —In the money that has been set aside, the government has said ‘We will collect $9 billion in royalties and we will pay back $700 million’. In that $700 million they pay back, if it is to go to resource-rich states those will include Western Australia and Queensland.But New South Wales has got coal in the Hunter Valley and in northern New South Wales. South Australia has got the uranium but we will see whether they develop it. Even Tasmania—

Senator Sherry —Tassie has got just about everything.

Senator JOYCE —Can you inform me of a state or a territory that is not resource-rich?

Mr Ray —The Australian Capital Territory.

Senator Sherry —Other than the Treasury officials who stay here in estimates—that is a definite resource.

Senator JOYCE —So we can make a commitment tonight that none, or not much, of that $700 million will be paid in the ACT? Apart of that, what does that statement actually mean—a ‘resource-rich state’? Where in Australia is there not a resource-rich state?

Senator Sherry —As we have indicated, and as I have certainly indicated in the case of Tasmania, the details of this are subject to negotiations.

Senator BUSHBY —Negotiations between who?

Senator Sherry —The states and the Commonwealth.

Senator JOYCE —Let’s go through this. We have got Queensland, New South Wales, Victoria, South Australia, Western Australia, Tasmania and the Northern Territory and they would all be fair to describe as resource-rich states and territories. That is seven. There is $700 million. That means for all they are paying they are going to get $100 million a year each if you average it out. How many kilometres of freeway can we build for $100 million?

Senator Sherry —There has been no suggestion that the money will allocated $100 million per state. That is your thought-bubble.

Senator JOYCE —It is your statement of—

Senator Sherry —As much as I would like to see money go to Tasmania, for example, I would not under any circumstances expect Tasmania to receive anything like $100 million, as you are suggesting.

Senator JOYCE —So you have the statement that you pay the superannuation which you do not actually pay, then you have an advance in regional infrastructure which you are not actually going to invest in. The whole thing is a sham.

Senator Sherry —The matter is subject to negotiation with the states. You have referred to superannuation which we do not pay. Again, that is just not correct, Senator. We went through this in great detail last night—the four elements that relate to superannuation in the package and the exact cost to budget. We went through this in detail. You are starting to deliberately waste the time of the committee by going back—

Senator JOYCE —No, Minister, you are doing your weather report tactics.

Senator Sherry —over questions that have been well answered, and they are on the Hansard record. Give Senator Bushby a go.

Senator JOYCE —This is the weather report tactic: read out the weather report to waste time. Can you explain the changes—

Senator Sherry —Your questions are much better than Barnaby’s.

Senator JOYCE —to the definition of gross national income, which defines the amount of aid we pay under the 0.5 per cent target?

Mr Ray —The short answer is that, when the annual national accounts were released last December, both current and historical GNI were revised up, the current by about $50 billion, I think. The change came from moving from the old system of national accounts to a new system. I cannot remember the exact reason, so I will take that bit on notice, but it meant that we had a larger base. Absent anything, it would have meant that, if the government maintained its ratios of ODA to GNI, there would have been a sharp increase in the number of dollars of aid, just as a result of this definitional change, so the government decided to phase in the effect of this change in the denominator on the numerator.

Senator JOYCE —Just going back to the resource super profits tax, doesn’t the RSPT share characteristics with bonds—that is, isn’t the government taking extra risks such as a downturn, where it will be liable for a payment? Where it is liable for payment, will those risks be recognised in the budget papers?

Mr Ray —Everything else being equal, I think it is a reasonable statement to say that the move to an RSPT introduces additional volatility into the Commonwealth government’s revenue base. The way that that has been accounted for is that it is taken above the line in the revenue estimates so that the estimate of potential losses has been included in the revenue estimate line. In the statement of risks, which is statement No. 8, there is a general statement about how revenue is subject to movements in the economy, and I think it specifically mentions the RSPT in relation to commodity price movements et cetera.

Senator JOYCE —Going back to our accountancy standards, that is a substantial risk you are taking on. You have said that if the mining projects in Australia go bad we are up for 40 per cent of the costs. Surely that is worth at least a note in its own right at the end of the accounts. If you presented a company with a set of books and they said, ‘Is there anything here we should know about,’ and you said, ‘We’ve picked up 40 per cent of the losses of all the mines in Australia but we’ve just contra’d it out in the income,’ the partner would drag you screaming across the floor and say, ‘You’d better have some working papers up here on that in the next 24 hours or we will not be issuing any sort of audit report on these books.’

Mr Ray —I do not know about that, but the approach we have taken is to quantify the estimate and to include that in the revenue estimates. Rather than say that there is a possibility that this will happen, we have estimated that possibility and included it in the account.

Senator JOYCE —I am sure someone is out there, a board accountant who is half finishing work and getting into lodgements and trying to polish things off, who would be absolutely fascinated to know that in our nation’s books we have taken up 40 per cent off the liability of the mining sector yet we cannot direct you to a note to express what that amount is, nor can we direct you to a note to tell you how we netted it out.

Mr Ray —I am not sure there is a question in there.

Senator JOYCE —The question is yes or no. There is no note, no working paper, no discernible thing I can pick up in the budget papers and say, ‘Ah, they are presuming a net liability of X amount of projects that go bad; there’s a total potential liability of X, a probability of Y, a booked amount of Y by X, and this is what is in the books.’

Mr Ray —The revenue estimates incorporate an estimate of what you are talking about, and then in statement 8, statement of risks, the variability that comes with the resource super profits tax is expressly mentioned. I do not know that it is in a note but it is in the statement of risks.

Senator JOYCE —We guaranteed the banks. What was the total potential liability of what we guaranteed—it was about $850 billion or something, wasn’t it?

Mr Ray —Are you talking about the guarantee of large deposits and wholesale funding?

Senator JOYCE —Yes.

Mr Ray —As at 5 April 2010, total liabilities covered by the guarantee were estimated at $169.6 billion.

Senator JOYCE —That is all right; I have got that—$169.6 billion potential. We know that is not going to happen. It is highly unlikely but it is there. We have got it; we have got the working papers behind it. Okay. What is our potential liability to the mining sector?

Mr Ray —I think that is a slightly different question. This is a potential liability. The wholesale funding guarantee is a contingent liability which is both remote and unquantifiable. The other liability that—

Senator JOYCE —Did you say that the mining liability is remote and unquantifiable?

Mr Ray —No, the one for the wholesale funding guarantee.

Senator JOYCE —But we managed to get a number for that.

Mr Ray —No, we have not. In fact, we have had discussions about that in the past. The contingent liability is remote and unquantifiable. That number is the total amount covered by the guarantee.

Senator JOYCE —Okay, but you would disseminate that amount from—I know because the numbers have been run past us before. You did actually have the total amount of what the bank guarantee covered. There was something like $850 billion and then it broke—

Mr Ray —I think that is the deposit one. For the purposes of this conversation—

Senator JOYCE —You know the question I am getting to: why can we do it for the bank industry yet we could not do it for the mining industry?

Mr Ray —Yes. I know where you are going. In the case of the financial claims scheme and the wholesale funding guarantee, they are contingent liabilities that are remote and unquantifiable. We have not quantified the liability. What we included in the statement of risks is an estimate of which deposits are eligible for the guarantee and those sorts of things, so it is a different thing. In the case of the resource super profits tax, the revenue estimate includes all the elements of the tax, including the matter you are going to, so it is incorporated in the revenue line; it is quantified.

Senator JOYCE —Why can we not pull out that amount and say: ‘This is how we came to that $9 billion figure. We’re going to pay out this amount for all these projects that go bad’?

Mr Ray —That is a question you will need to direct to my Revenue Group colleagues. If you want to know how the estimate is built up, they can provide you with more information.

Senator JOYCE —Have you run some scenarios about what will happen under different assumptions of different mining sector performances?

Mr Ray —One of the scenarios in the sensitivity analysis, which is incorporated in the budget, is what would happen to the budget estimates if the commodity prices were lower. As to the specific thing around just looking at the mining sector, I do not know whether we have done that.

Senator JOYCE —I am sorry; can you repeat that Mr Ray.

Mr Ray —In the sensitivity analysis, which is in appendix A to statement 3, a scenario is run which is just illustrative. It is called the ‘Illustrative impact of a permanent non-rural commodity price fall consistent with a 1 per cent fall in nominal GDP in 2011-12 (per cent deviation from the baseline level)’. There is another one entitled ‘Illustrative sensitivity of the budget balance to a 1 per cent decrease in nominal GDP due to a fall in the terms of trade’.

Senator JOYCE —What page are you on?

Mr Ray —We are on pages 3-24 and 3-25.

Senator JOYCE —Which budget paper?

Mr Ray —It is in Budget Paper No. 1. So the specific thing we look at is the illustrative impact on the budget of a permanent fall in world prices of non-rural commodity exports.

Senator JOYCE —Where is the money in there that we are actually paying out to projects that go bad? That is not in there. That just talks to the revenues, doesn’t it?

Mr Ray —It is a more general thing, so the measure that is included in the budget would be a central estimate.

Senator JOYCE —What does ‘central estimate’ mean?

Mr Ray —There is no sensitivity around the individual measure.

Senator JOYCE —There is no sensitivity around it?

Mr Ray —Not published in the budget.

Senator JOYCE —Not published in the budget?

Mr Ray —Yes. Whether my colleagues in the Revenue Group have looked at sensitivity analysis, I do not know; you would need to ask them.

Senator JOYCE —For risk management purposes, would it not be more diligent to have greater sensitivity to the risk management?

Mr Ray —Are you saying: could we include additional scenarios, or could the government include additional scenarios and have further sensitivity analysis in the budget? I suppose it could.

Senator JOYCE —This is a substantial income stream. It is a massive income stream and a substantial risk.

Mr Ray —Again this is not quite in the right group, but I think if we went back and looked at the impact on capital gains tax receipts of developments in 2008-09, you would see that they were pretty significant and substantial too.

Senator JOYCE —The capital gains tax?

Mr Ray —Yes, or tax receipts generally on what happened in the economy.

Senator JOYCE —But we did not pick up a contingent liability with the introduction of the capital gains tax. We never said to people, ‘If you lose money you’ll have a capital loss, but we don’t actually have to pay you out the money.’ In this one, we actually have to send them a cheque in the mail for the loss.

Mr Ray —True, but if you get a capital loss you carry it forward.

Senator JOYCE —Yes, but this is entirely different. A capital loss is only carried forward to the point in time where you have a capital gain and you then write one off against the other. The government never actually has to send out a cheque. In this case, my oath, they are sending you a cheque for billions of dollars in the mail.

Senator Sherry —Putting aside the rhetoric and the other language—

Senator JOYCE —The other language?

Senator Sherry —The question, to the extent there was a question there, was surrounded by substantial rhetoric, political argument et cetera, which Mr Ray, to be fair, cannot go to. You touched on, referred to, probed and questioned on this issue with the Revenue Group, which is the appropriate group. You are perfectly entitled to come back and try a second time around, but—

Senator JOYCE —To get answers for the Australian people? Is that what I am trying to do?

Senator Sherry —This is not the appropriate area of Treasury.

Senator JOYCE —So that is the weather for today. That is two minutes of our lives we will never get back. I have been looking at an ad that you have had in the paper. You are seeking a suitably qualified and experienced speechwriter—I would like to suggest Senator Cameron—to prepare engaging and influential speeches to be delivered by the Treasurer, other Treasury portfolio ministers and senior Treasury staff. I notice that you are paying them more than we get paid.

CHAIR —That is because they are going to be engaging.

Senator JOYCE —Can you please explain to me what an engaging speech is?

Senator CAMERON —The one you gave at the Press Club. Remember the one before you got sacked?

Senator JOYCE —Can you give me an example of an engaging and influential speech, as opposed to a boring and pointless speech?

Senator CAMERON —The one you gave at the Press Club. Remember that one?

CHAIR —Order! I think we are all interested in this question.

Senator JOYCE —$157,505 per annum is not a bad wicket. Has that job been filled?

Mr Ray —I have a feeling it may have been.

Senator JOYCE —Who is the lucky soul who got that?

Mr Ray —That is a question I do not know the answer to.

Senator JOYCE —What speeches have they written lately?

Mr Ray —I do not know that the person has started.

Senator BRANDIS —We will know when they have started when we start hearing engaging speeches.

Senator JOYCE —Can you direct us to when you think we might be seeing the first work from this bard of the Treasury?

Mr Ray —I am happy to take on notice when we expect this person to start work.

Senator BRANDIS —This Cicero!

Senator JOYCE —This Tennyson of tax!

Senator Sherry —Very good.

CHAIR —Perhaps you should apply for the job, Senator Joyce.

Senator JOYCE —It is not a bad wicket.

Senator BUSHBY —You would get a decent pay rise out of it.

Senator CAMERON —Accountants are not allowed.

Senator JOYCE —I have some questions on funds allocated in the Department of Climate Change and Energy Efficiency budget. Have we dealt with the $132 million that was allocated to a program that no longer exists?

CHAIR —Yes.

Senator Sherry —We have had questions on that.

Senator JOYCE —Are you aware of a company Serco Pty Ltd?

Mr Ray —No.

Senator BUSHBY —They should be.

Senator JOYCE —You should be.

CHAIR —Would you care to elucidate?

Senator JOYCE —There is a company called Serco Pty Ltd. Has the department agreed to limit this company under contracts that were signed in December last year?

Mr Ray —I honestly do not know what you are talking about, so I will take the question on notice and find out.

Senator JOYCE —How about if I give you a bit more information?

CHAIR —I think we might be pretty close to the dinner break, so I will suspend this hearing. I thank the Fiscal Group of Treasury for coming along to estimates.

Proceedings suspended from 5.29 pm to 6.31 pm